Selling a call with a synthetic

Discussion in 'Options' started by jcheak, Dec 29, 2007.

  1. jcheak


    I have a question. The scenario is you buy one naked call that expires 6 months from today. 15 days later....your in the money.(ie. either the stock moved up, or IV shot up). Now you want to lock in your gain, but you don't want to sell the call yet. How can this be done?

    I thought you could sell a sythetic call. (ie. long the underlying and then buy a put) or use futures.

    Any thoughts?
  2. MTE


    Selling a synthetic call means that your overall position is flat, which means there's no point in doing so. All you're doing is creating more commissions and slippage.

    You can sell a higher strike call to create a vertical spread.
  3. exactly...your now ITM call IS basically stock so just sell another call creating a vertical like MTE suggested or month to month a call against it...calendar or diagonal.
  4. rosy2


    how is this a short synthetic call? it looks like a long synthetic call to me
  5. MTE


    Good point, rosy, the short would be the reverse of the above. I didn't even bother to check the details.
  6. jcheak



    Thanks, it is the reverse if your going to go short to flatten out the position. I'm glad you knew what I ment but I will be more exact in the future. - no pun intended.

    I guess the reponses so far pose a new question for me which I dont understand. If you start selling another call instead, to create a spread, did you mean that you hold both calls until expiration as MTE or Richard suggested?
  7. MTE


    You can if you want hold both calls until expiration, but you obviously don't have to. You can trade in and out of the short call if you want to or rather if your market timing skills are good.
  8. You can do several things to lock in your gain, depending on how the gain arose. Bear in mind that although you will be locking in some of the gain since by staying with the position, you'll be risking some add'l loss should your decision to stay in the position be wrong.

    If you're ITM because the stock shot up, you can:

    1) Sell another call, creating a vertical spread. If the premium received equals your long call's cost, you have a free trade. If it exceeds it, you have locked in the difference.

    2) Roll the call up, pulling some seed money out of the position... and possibly some profit as well.

    3) If the stock has risen enough, you can buy a put at the next higher strike, creating a guts strangle which is essentially the same as the standard strangle. If the total premium paid for the two legs is less than the difference in strikes, you have a locked in gain with the potential of big gain to either side should the underlying really move.

    If your gain came from an expansion of IV, I'd consider #'s 1 and 2 above or closing the position. What expands also contracts.
  9. You can go flat deltas with short-spot and maintain all greeks, save for deltas. This assumes that you're going to hedge your gammas dynamically -- continue to adjust with spot as gains are seen.