Hi, I am new to option trading. I learned that by buying a call and selling a put at same strike price will simulate a long position. Does that strategy work? Is there any implicit risks of this strategy?
It's called a combo. But I think you're getting at this is less a trading strategy than an investment one. It's something I only do on a stock I want to own and want exposure to today, know I will have the cash for, but don't have it yet. The risk is the same as holding the underlying directly, but without accruing the margin interest (so long as you have the 25%-ish to cover the margin requirement). You'll have a liquidity risk on it (large spreads on the option contracts), you'll pay a bit more in commissions, and you'll pay if you ultimately exercise (or get assigned). The risk of early assignment...basically, just the risks inherent to options. You get quite a bit back for those extra risks you take on though...for example, you could buy a further OTM put to limit losses, If the trade goes your way, you can close the short side and just let the long side run. You can roll... The short version is that if you have the cash on hand, buy the stock. If you want the exposure now and will have cash later, it's a great position. And, I wouldn't suggest using it this way unless you have other substantial assets in the account already (i.e. it's not a good idea to build an entire portfolio that is essentially giving you 4:1 leverage--or more with some brokers, I guess) I have one open now (actually just the long call, I closed the short side) on SQ because I wanted it at the end of June, but won't have the cash until my bonus hits next month.
Every trade is technically a strategy of some sort or variety, depending on the person deciding to implement it.
What advantage does going long the synthetic verse long the outright have I think is your question.. less margin, higher comission ... Buying a put lower is just marrying it to your synthetic just like a married put and just like a call spread, all these are fungible with each other..... There are other things to trade with options why cancel them out?
The only real reason to do this versus buying the stock is if the stock is hard to borrow. When you do this trade you will be able to capture some of the hard to borrow benefit.
This is the formula : P + S = C P put option S stock C call option + buy / long - sell / short you can shift the formula around like P = C - S -P - S = -C etc