What is the optimal time frame for an option buyer?

Discussion in 'Options' started by inandlong, Sep 11, 2002.

  1. Options guys,

    I need your help. I trade longer term and still short stocks. My trades usually last between two weeks and three months.

    I am interested in buying puts as an alternative to shorting stocks. I trade mostly NYSE stocks and many of them pay dividends, plus the interest charge.

    I am not going to get heavy into the greeks, and the only question for me is do I initiate a synthetic short or just buy the puts.

    When buying the puts, I understand the 90-120 day time period affords me the best protection against time premium decay. I plan on bying deeper in the money puts...after all this is an alternative to shorting the stock.

    Plus, your thoughts about the synthetic short v. the DITM puts is appreciated.

  2. Also, when establishng a synthetic short, where should the strike price be?
  3. Just posting to put this back up on the Home board.

    Okay after reading thru some internet info, it would seem that the benefit of the synthetic short is the delta neutral position it puts you in vs the DITM put alone. And the offset of the put premium with the call premium. Is this correct?
  4. Thanks options guys...you have really helped.

    As I understand it, the synthetic short's neutralization of theta is the result of the neutralization of delta.


    How about the moderator....?
  5. Synthetic short.
  6. Well, there is a lot floating around in this. A put has different characteristics than a short or synthetic short, chiefly the limited risk feature. I don't understnad the reference to delta neutral. You don't want to be delta neutral, you want negative delta. The deeper an option is in the money, the higher the delta. Anyway, a synthetic short, ie long put/short call, is not delta neutral, it has negative delta.

    Regarding the time issue, I will quote options guru metoxx," it depends..." You minimize time erosion with longer dated options, but there are also other issues to consider, such as liquidity and spreads. Typically, they will not be as favorable.

    I am dubious about a strategy of buying puts to replace longer term shorts. I would do it only in conjunction with a timing system that ensured I was buying when VIX was low and reversing. Otherwise, you are flying into a pretty efficient headwind that is sure to grind you down over time. Of course, we could get a huge market break and you make out like a bandit.

    Actually, you sound like a perfect candidate for single stock futures, which are a much better vehicle for what you want to do.
  7. Its actually a pretty multi-faceted question you pose...A synthetic position, obviously can be done "split strike" with any number of combinations...But you should probably evaluate the strikes, the volatility, the time to expiration, etc, etc...Also different options classes have different skews that you need to be aware of and that will affect which type of synthetic position has the best odds...

    As far as time to hold the position, you always have ways of reducing your theta, vega, gamma exposure thru spreading, covering, etc, etc...Alot of people seem to forget that you can ALWAYS reduce size, take partial profits, etc...It seems that many people get completely hung up on the ultimate WHEN...How about in pieces, always, just reducing your basis cost but still keeping some positive exposure if you want to have a volatility bias or a directional bias...

    Its really a much too general question to suggest one strategy over another...Use your creativity...
  8. Wow guys thanks. I have always known the heady traders were in the options game. And I'm not talking speculation on ATM calls.

    And I was wrong about the delta neutral, but actually I thought the purpose of the synthetic short was to create a delta of 1, or -1 in the case of the short, so the position would trade "as if" it were a stock. That is probably what you meant when you said a negative delta and it is just taking my pea brain a minute or two to "synthesize this".

    To do this, I am reading at OptionVue that the strategy involves buying a put and selling a call of the same strike and expiration date. Without any of the wizardry you guys know how to do, isn't this the case?

    Also, and thank you so much for responding... in the case of a synthetic... for example today right now GM is trading at 47.07

    The Dec 45 synthetic short I could sell the call for 5.30 and buy the put for 3.60 create a credit of 1.60. The 47.5 synthetic short I could sell the call for 3.80 and buy the put for 4.70, creating a debit of .90. Why would I create the debit vs the credit? Is it just about early assignment on the put?

  9. Actually I think you want a delta of -1 or at least a negative delta.
  10. Not that I think GM is a short right now... but if it were!!!

    #10     Sep 11, 2002