Oh . . . is that saying that buying delta in calls is going to kill me when the stock rallies? What if I buy a gamma neutral position? (Understood that I might have to readjust as the underlying changes.)
No, that is not what I'm saying. What I'm saying is, when you buy soft money calls, you are making an explicit bet on vol which tends to contradict your direction. I don't understand how being gamma neutral is going to solve that. If you are net long vol and gamma neutral you are still making the same explicit bet.
Maybe I should phrase it in the original context: With the right split strike synthetic long, it seems I can minimize volatility exposure and go positive theta. What is wrong with that approach?
Nothing is wrong with that. Just like there is nothing wrong with coloring your hair pink. You are long synthetic stock. You could buy the actual stock just as well. Or you can split the strikes as you suggested and change your p&l profile. You'll need to be a better trader trading the synthetic vs the actual, but maybe you are a better trader. Not sure what your question is.
Well, I am trying to understand the alternatives to going long on the stock. Buying the stock outright gives me no exposure to any of the Greeks. Going synthetic long in certain scenarios seemingly not only provides me the same delta but also puts time and gamma on my side. I'm trying to understand why I don't find this discussed anywhere. The 2 most likely answers are (1) I don't understand what's going on or (2) nobody wants to teach the details. (Or maybe (3) the details are in the noise.) Certainly my recent experiences going long calls are not "in the noise" -- I had the direction right and the trade results were all over the map. I am trying to learn from my experiences.
Your trade results were not as expected because you purchased OTM calls. As Maverick pointed out, if the stock rallies the implied volatility of the calls will likely drop which will hurt you, and if the stock doesn't rally the time decay on the calls will hurt you. That is not to say that being long OTM calls might not be the right thing in certain circumstances, but in your case - where you are trying to mimic the return of being long the stock - it is definitely not going to fulfill your expectations. In my opinion, DITM calls are going to be the closest thing to long stock for you, that also has the limited risk nature which you noted that you desire. As an aside, with regard to your point "puts time and gamma on my side," it's important to realize that theta and gamma are always opposite in sign. If you want to "earn" time decay then you have to be short gamma, and if you want to be long gamma then you have to "pay" for time decay. It might appear from your model results that you have both being positive in some of your examples, but in reality they are opposite, it's basically an identity. See e.g. http://www.wilmott.com/messageview.cfm?catid=8&threadid=77141. By the way, congratulations on your profitable system. By changing the calls that you are buying to DITM it seems to me to make sense that it should likely work for calls also unless the additional commissions, slippage, and slight theta cost above just trading the stock kill your profit margin. I will also throw out several books that might be helpful that focus on the practical side of trading and synthetics since you mentioned that you might be focusing on the math too much: Option Market Making by Baird and Options Trading: The Hidden Reality by Cottle. Two of my personal favorites. Best of luck to you.
Thanks. I thought the theta/gamma relationship wasn't necessarily true for a position? It's hard to imagine I'm adding the numbers incorrectly.
I've been re-reading a couple of my options books, and I see some of the points made on this thread more clearly. Thank you. I have a specific question about one suggestion from several days ago (a vertical spread): are the arguments against that strategy the same as those against a covered call? Is there something about the "underlying" being a long DITM call instead of the stock which changes the nature of that sold call?