synthetic calls

Discussion in 'Options' started by bismain, Apr 6, 2007.

  1. bismain


    I have been looking at synthetic calls on the SPY - say long 100 shares spy and long 1 dec 07 ATM put. According to TOS analyze page my max loss until put expiration would be $491 . If I sold calls against my 100 shares currently at 144.31, could I not mitigate the cost of the put, which would act as a stop loss and eventually end up with a risk free position, at least until dec , or longer if I went even further out with the put . I realize that i could get called out of my shares but again according to TOS that would still result in a small profit. I dont believe in free lunches so I have probably missed something. Feel free to belittle, berate, and browbeat me for what could be a glaring omission in my analyzation or spelling for that matter. I also tried this with aapl for a much better result but I am using SPY because it isnt as volatile
  2. MTE


    Yes, there's something you're missing and the risk graph is not showing it, it's the cost of carry, which is about $3.10 according to the conversion/reversal. So any "risk-free" profit you see will be wiped out by the cost of carry.
  3. bismain


    What if this is done in a cash account such as an IRA ?
  4. Long stock + long put = synthetic long call, but natural calls can be bought in most IRAs.

    You can find IRA trustees that will allow defined-risk spreads and cash-secured put writing:

    That includes the aforementioned conversion trade [long spot/short call/short same-strike put]. Finding profitable conversions is another matter.
  5. Cash vs margin account doesn't matter. You could stick your money into a risk free CD and earn at least $3.10 if you kept your cash rather than sinking it into stock.
  6. If you buy stock, then short call and long a put at the same strike, that's a Conversion, and all you're doing is synthesizing interest (but less then you'd get by putting the money you put into the stock into a t-bill or something, because you're paying commissions for 3 orders + spreads on the options)
  7. If you sell an otm call against your long stock & long put (aka synthetic long call) you end up with a collar (aka bull call spread).
    If your strikes are the same you get a conversion (as MTE said) and your cost of carry (C of c) is the 'profit' you see on TOS (as mentioned by others). Look at synthetic relationships and you'll be able to work out a lot of these type of questions yourself.
  8. I actually made a small spreadsheet where I punch in the values for the stock, call, and put bid/ask, dividends, and days to expiration, and interest rate (T-bill rate), and it'll calculate whether a conversion or reversal is profitable or not. It calculates it based on buying at ask, and selling at bid, and mid-point calculations too.

    99% of reversals/conversions are NOT profitable due to the spreads.
  9. Most important is whether you're looking at American or European style options.

    You can put together boxes (and C/R) on OEX that are insanely profitable. Except you'll get assigned immediately, and generally only in the case when you're guaranteed to lose money. (OEX is cash settled, so an assignment of a box leaves you with a very ITM synthetic put or call. Also, OEX can be exercised at the cash settlement price of the day well after the close of the day, so you get a peek at the aftermarket and futures movements).