What is the optimal time frame for an option buyer?

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

  1. Maverick74


    I have a question for you and a possible suggestion. My question is what is your reason for not wanting to short the stock versus buying puts. Is it the margin that you have to put up? The reason I ask this is because it's a very important question regarding what you want out of your position and what you don't want.

    What you want is to be able to profit on the short side of the stock. At the same time you don't want to deal with wide option spreads and time decay right. So the answer here is quite obvious although it has not been brought up. I don't know if you know this or not but you can create a virtual option with just using stock. Think about what an option is and what it does and what the profit profile looks like and then ask yourself how can I duplicate this profile using just stock. Remember its the curvature in options that create your profit profile. you can create that same curvature by buying and selling the stock with the same slope of the option.

    Example. If you want to buy a put on xyz you could short 50 shares of stock and then continue to sell 10 shares every .50 down for lets say 2 1/2 pts, at that point you will be short 100 shares of stock. As the stock comes back up you could buy back those shares in the same increments. If you bought the front month ATM put you would be doing the same thing. The put would be the same as being short 50 shares of stock and as the stock dropped you would be getting shorter by the same amount up to parity.

    Why should you do this. For one, you don't have to pay the enormous spreads in some cases that options have and two, no time decay. Think about it. You could buy a virtual put with no time decay and no spread.

    Just something to think about. What you will learn about options and even trading in general is that it does pay to be creative. Think outside the box.
    #31     Sep 12, 2002
  2. Thanks for the recent responses guys. I have looked at that aadsoft site. I actually downloaded the software but couldn't figure it out.

    Maverick... when I short a stock I have to pay interest. And the NYSE stox I trade pay dividends which then I must pay also. So when I read the synthetic short info as the alternative to shorting stox I'm interested. Same with the DITM put.

    Now there is not much fooling around in the options forums, a good thing, and the gang here has a reputation for being sharp. So I'm trying to get the best and the brightest thoughts about the synthetic short vs the DITM put vs shorting the stock.
    #32     Sep 12, 2002
  3. inandlong,

    I understand you having to pay a fee to borrow stock to short. However, is there not also a "short stock rebate". Meaning, the proceeds received from selling the stock short could be earning interest?
    #33     Sep 12, 2002
  4. As I recall, I don't think you earn interest on the proceeds from the short sale.
    #34     Sep 12, 2002
  5. Depends on who and where you are; but in any case there is a haircut ...
    #35     Sep 12, 2002
  6. Now there is a term that I have seen and know nothing about outside of the barber shop.

    Man, you hang with options guys and it's a new world.

    #36     Sep 12, 2002
  7. There are pretty much haircuts on anything. My broker doesn't loan me stock @ the broker call rate. He sets a margin rate. I can't borrow money from the bank for 3-mths at the 91 day T-Bill rate. Of course, I just can't print more money when I need it either. Although, if I were borrowing a large enough sum, I guess I could short a Eurodollar Futures contract and lock in a borrowing rate. Metooxx would know better than I, but I would think there are arbitrageurs out there that make a living out of trading the basis between real and synthetic asset combinations.
    #37     Sep 12, 2002
  8. We don't; but I know guys that do ...
    #38     Sep 12, 2002
  9. Maverick74


    Forget about dividends. You are earning anywhere from 1% to 5% on a dividend and paying anywhere from 10% to 30% on an option spread. You will make far more money not paying that spread then earning the stock dividend. Also, the problem with your synthetic put is margin. If you sell the call and buy the buy the put you will have to put up a lot of money in margin for that naked call. As far as the DITM put, you have to understand that since those options are hardly traded at all, the MM will have a wide spread on those so he can scalp the stock. Remember he has no gamma or vega on those options so he is forced to screw you on the price if he wants to make any money on them.
    #39     Sep 12, 2002
  10. rs7


    Haircut...simple explanation.

    You are long or short an option, or an equity or a commodity. The exchange determines your risk. This is added up and applied against your capital. So now your available capital becomes "haircut" (reduced) by that amount.

    It differs from issue to issue. A $100 stock that has a (let's call it "risk" to simplify) of $2 will incur a $2 haircut.

    If a more volitile $100 stock has a "risk" of $5, then you incur a $5 haircut (all per share of course....) and the same with options.

    It ("haircut") is used rather than margin for members. Not complicated. Does not apply to customers. Really not complicated. So now you too know. Welcome to the "new world":)
    #40     Sep 12, 2002