synthetic stock

Discussion in 'Options' started by brad52, Jan 24, 2010.

  1. brad52


    Hi everyone. I am new to this forum and in real life I don't have anyone to bounce ideas off of. I think I have found an edge and would like some opinions on a new strategy Im thinking about. 09' could not have been better but I have taken it hard in the shorts recently and have given back 12% of my account and I am really bumming out. So, before I try this with money I would like to hear your thoughts.

    I want to create a long synthetic stock (futures) option with long term or LEAPS options on a stock with ATM options. This position should be able to be created for very small debit if any at all. Then I want to sell a near term slightly OTM call to capture credits. The synthetic stock should act like regular stock and if Im assigned I am covered by the long LEAPS. If not assigned write more calls the next month etc.

    As a hedge I want to create a similar short synthetic stock position on the same stock with the same expiration and sell OTM puts against the short synthetic stock. Everything same as above except short.

    Both sales cant be in the money at expiration. Though both may expire worthless. Additionally at expiration both the long and short positions should be worth exactly the same as each other or nearly so because what one position lost the other gained. There is little if any residual loss of value due due to theta decay but its roughly the same for both LEAPS positions and where one position in each side of the same transaction lost theta the opposite side gained.

    I am basically considering this as a six legged trade. I am fiddling with the idea of selling both calls and puts ATM and accepting there will be an assignment. What am I missing? Where is the risk?

    I know I have been long winded here but thanks for your time.
  2. 1) The synthetic long "offsets" the synthetic short. To initiate both trades is a waste of money because of fees and slippage.
    2) If you want to do systematic covered call writing, you should do that by itself. If you want to do systematic covered put writing, you should do that by itself, not both together simultaneously.
    3) If you do both simultaneously, your net position becomes a straddle or strangle, i.e. the short-call AND the short-put. Your "6-legged" trade is actually only a "2-legged" trade. That's one "thing" that I believe you are "missing".
    4) BEFORE expiration, it's possible for one or both sides of a straddle or strangle to have traded in-the-money. That will cause you stress and aggravation during the life of the trade. By focusing only on expiration, you're not taking into account where you'll have to think the hardest while managing the trade. That's another "thing" you are "missing" and risk you may be underestimating. :cool:
  3. nazzdak is very much correct. The synthetics are completely useless in this case. Being short strangle/straddle eats up alot of margin because both shorts are naked, also these strategies are mostly a gamma scalping tool and I doubt that is what you are looking for judging by your post. You might want to take a look at iron condors considering your objectives. Look for stuff from dagnyt, he's basically the official IC pom-pom boy around here.
  4. brad52


    thanks for the advice. I appreciate it.