Synthetics Question?

Discussion in 'Options' started by Balljet, Nov 17, 2007.

  1. Balljet


    Please help me figure this out..

    I am comparing a collar with stock and a vertical.
    Buy 100 XYZ at 100, sell march 110 call for 15 and buy march 100 put for 16
    just buying the mar 100 call and selling the mar 110 call vertical

    I guess synthetically those are the same positions, so what gives... why would one prefer a collar?

    why do a collar?

    I am in need of help.. I am loosing it.. :)

    Thanks Patricia
  2. Same reason one would sell a naked put instead of constructing a covered call using the underlying stock.

    The vertical is much less capital intensive for the same reward. The capital left free can be used elsewhere to generate additional returns. I'd only advocate use of the collar if holding/selling the shares is a necessity.

    Collars are used most times during a buyout or merger to provide the purchasing company some protection throughout the transaction.

    165/170 bear call vertical
    Credit received = $250
    Buying Power used = $250
    Max Profit = $250

    Collar (synthetic equivalent)
    Buying power used ~ $8,200
    Max Profit = $250

    Would you rather tie up $250 to make $250, or would you rather tie up $8,200 to make the same $250? The other $8,000 might as well be invested somewhere that you can get an extra 6% annually. Many brokers will also let you use such investments as collateral to fill margin requirements.
  4. rosy2


    they're not the same synthetically.
  5. Balljet


    Hi Landing..

    So.. why would anyone use a collar? Since there is less margin req. it would make sense to always use verticals? Yes??

    and why did Rosy say, no it is not the synthetic equivalent?


  6. rosy2


    my mistake. forget it
  7. MTE


    A collar makes sense when you already hold the stock position and need to temporarily hedge it. In this case, you would use a collar since there's no point in selling the stock and then opening a vertical.
    If you're starting flat though then generally you'd be better off trading the vertical.