Synthetic stock (buy call & sell put) - can you get assigned or not?

Discussion in 'Options' started by blink18, Apr 10, 2020.

  1. blink18

    blink18

    Is it possible to not get assigned if you buy a synthetic stock? At IB you can buy a combination called "synthetic stock": long call (buy to open) & short put (sell to open), same symbol, same month, same strike, same number of contracts, american style option.
     
  2. cvds16

    cvds16

    as soon as the put gets deep in the money or is in the money at expiration date you will get assigned.
     
  3. ffs1001

    ffs1001

    As long as you are selling an option, you can get assigned if it goes ITM. The name 'synthetic stock' does not change the fundamental nature of having a short put. By selling an option, you are taking on the obligation to having it being assigned to you. This is why you are receiving a premium for it.

    The only way to reduce the chances of getting assigned is to buy back the short put when the time value on it decays and is pretty close to zero, which will happen if the option is deep ITM, or close or expiry, or both. And keep a close eye on dividend dates if trading individual stocks.
     
    tommcginnis likes this.
  4. tommcginnis

    tommcginnis

    Did you sell a put contract? Yes.
    Does that option create a contractual responsibility on your part? Yes.

    o_O
     
    DTB2, donnap and deltaf0rce like this.
  5. FSU

    FSU

    Its possible, but not likely.
    Say you buy a synthetic where you buy the 50 calls and sell the 50 puts. If the stock closes exactly at 50, neither side would be automatically exercised. The holder of your shorts would still have the option not exercise his options, so even if it the stock closed just under 50, the holder of your short puts may decided not to exercise based on after hours movement of the stock.
     
    donnap likes this.
  6. deltaf0rce

    deltaf0rce

    If the stock is at 48 and he wrote his 50 put at $1 he is getting exercised. Being wrong on the long side is bad enough, getting exercised to the short side will have you jumping out a window. If you don’t have excellent directional success you’re going to blow up doing this.
     
  7. Put differently, the buyer of your contract doesn't know you have a synthetic stock strategy held at IB. They just have that one contract. You can get assigned (but of course, can also exercise or sell the long option at that point).
     
    tommcginnis likes this.
  8. tommcginnis

    tommcginnis

    • If the underlying is at $48, a $50 put will be exercised without any regard for its original selling price.

    • "Being wrong on the short side" is a great way to buy stock you wish to own at a significantly reduced price. If the underlying is at $50 and you buy it, and it falls to $48 -- you're down $2. If the underlying is at $50 and you *wish* to buy it, but you instead sell a $48 put for $2.25, you're up 25¢.

    • Doing any of this without a profit&loss graph is not smart.
     
  9. deltaf0rce

    deltaf0rce

    I can do the “money in / money out” T-chart too. Which you did wrong by the way. Did you somehow buy a call ATM for no premium?

    The truth is, you’re not trying to get long the stock, otherwise you would just sell a put. Instead, you’re trying to get massive leverage in the call by financing it with said put sale.

    While it sounds nice in theory to do that, your broker is going to hold you to naked put margin and so that’s really all the leverage you are going to get. Meanwhile you are rolling the dice on both being directionally wrong and now also 1: exposed short, with no buffer because the call ate your premium 2: potentially levered and unable to cover your short if you get gapped and thus 3: blown up.

    I’m sure nobody in the last month can relate.
     
  10. deltaf0rce

    deltaf0rce

    Being long a call does nothing for you when you’re exercised on a short put
     
    #10     Apr 11, 2020