spread with different months

Discussion in 'Options' started by 0008, May 14, 2005.

  1. 0008


    If I buy an ATM call of the front month and sell an ITM put of the futher out of the same underlying. What is the name of such combination?
  2. MTE


    How about a Diagonal Synthetic Long Stock. :D

    I don't think there's an "official" name for this combo, I would love to find out though if someone knows it.
  3. I would call it a gut calendar risk reversal. no official name for the spread- it is a strange spread to want to do
  4. Trajan


    I would probably just call it a diagonal combo.

    Another may be the diagonal-inverted-risk reversal.
  5. lar


    Maybe if the underlying were stock one could imagine calling this some kind of spread. A "reverse diagonalized synthetic long " - with an explaination (G!) sorta captures the essence.


    If the underlying is/are a futures contract(s), I would not treat that position as a spread... maybe possibly if both sides were serial and fungible when exercized/assigned.

    If I had such a futures position, I'd treat them separately as a naked short ITM Put and a long Call for planning purposes.

    I'd wager SPAN would treat them separately for margin purposes as well.
  6. lar


    We could name the critter now...

    How about the 0008 spread, named after it's creator. :cool:

    Of course, trading it would be a whole 'nother can of worms I wouldn't want to open up.

    Peace and gtty,

  7. 0008


    Is such combo risky? What is the profit potentinal?
  8. MTE


    Essentially it is the same as a long stock position.
  9. nitro


    Actually that is not quite accurate:

    Delta of ITM (the deeper in the money the greater the delta) put approx = -1. Since short the put the delta goes to +1. (The fact that it is a farther out month option reduces the delta of the put a little, but these are approximations anyway since no actual prices are given.)

    Delta of ATM call = approximately .5. Since long the ATM call that is another +.5 delta added to position for a total of 1.5 deltas.

    This is closer to a synthetic position whose net delta is approximately 1.5. So being long the underlying and also being long an ATM call is approximately the same position.

    These are very rough approximations as the original poster does not state what the underlying is and the corresponding volatilties of each months options and whether dividends are involved.

    If I had to name this position, I would call it "delta 1 plus fractionally long." So if you cannot afford say to buy 200 shares of a stock, but you can afford to buy say 140 shares of a stock, this would be a way to do it without worrying about odd lots. (Although come to think of it, the margin requirements of the short put might the same as long the underlying regardless of it's delta's. Some brokers are getting more sophisticated with total risk in a position and the margin required to maintain "complex" positons so I don't really know the answer...)

    Alternatively, if you needed a more perfect hedge ratio, this would be a way to get closer to your desired hedge (and it would not be a "position" per say since it is being used to remove negative fractional deltas from your "true" position. But there are easier ways to do this I think...)

  10. 0008


    Does it mean there isn't any advantage over just buying the underlying stock?
    #10     May 15, 2005