# Synthetic Swing Trading with Option Spreads



## wayneL (24 June 2009)

This is not something I am doing but read in a book I bought - "Commodity Options" by Carley Garner and Paul Brittain.

It is constructed (if going long the market) by buying the ATM call, selling an OTM call, and selling an OTM put.

There are a couple of ways to look at this synthetically:

1/ A bull call spread with a naked put tacked on.
2/ A short strangle with an ATM call tacked on.

(I look at things this way to visualize possible adjustments)

I haven't got my modeller on this 'puter so no payoff diagram, you'll have to do some bloody work yourself. 

The idea is to have a zero cost bull call spread paid for by the naked put, with indeterminate risk below the put strike.

Not a recomendation, but put up for discussion.

Thoughts?


----------



## mazzatelli1000 (24 June 2009)

Hi Wayne, 
It is great to see you back, you have been missed!!!

I am assuming that supply skew is present, so the bull call structure would benefit from that, thus the same structure in equiy/index market may not be as favourable.

Greeks are trimodal except for delta 

May I ask if the ratios are 1:1:1?


----------



## wayneL (24 June 2009)

Yes 1:1:1

They did not mention skew in the book. As futures options encompass various products that may have demand or supply skew, I didn't draw any conclusions in that regard.

Playing with strikes/expiries can make some interesting scenarios. I'm not sold on it as an initial strategy, but I thought it interesting as some of my delta neutral trades end up looking a little bit like this at expiry, after adjustments.


----------



## Trembling Hand (24 June 2009)

Добро пожаловать comrade


----------



## mazzatelli1000 (24 June 2009)

I assumed supply skew due to the title of the book. 

I'm not sold on it either if it is to be used for swing trading as gamma gets shorter as bull deltas accumulate. At this point I'd rather hit the futures

May I ask if you trade commodity options Wayne?


----------



## Grinder (24 June 2009)

If it can be put on for a credit & you have bullish bias makes alot of sense for a swing play, even if it stays between the put & lower call strike it could be profitable. Don't like the unlimmited risk on the downside past the put though, makes me shudder if you get the direction completely wrong & the sp tanks.

What would you defend such a move?


----------



## wayneL (24 June 2009)

mazzatelli1000 said:


> I assumed supply skew due to the title of the book.
> 
> I'm not sold on it either if it is to be used for swing trading as gamma gets shorter as bull deltas accumulate. At this point I'd rather hit the futures






The debit free trade above the put strike only applies at expiry as well. 

Futures win for swing trading - agree... apart from when the planets line up for options.


> May I ask if you trade commodity options Wayne?



Yes I like what Stuart Johnston calls the Non-Seasonal trade. i.e. sell options on the safe side of seasonal tendencies, with a strong reference to historical moves. 

As commodities tend to stay in a defined range most of the time, it works well. Just have to avoid suicide seasonals, those times of the year when the counter seasonal move can be vicious... like when weather events can spawn black swans.


----------



## wayneL (24 June 2009)

Trembling Hand said:


> Добро пожаловать comrade



длиной живет виток, друг.


----------



## prawn_86 (24 June 2009)

I thought this was an english site :


----------



## wayneL (24 June 2009)

Grinder said:


> If it can be put on for a credit & you have bullish bias makes alot of sense for a swing play, even if it stays between the put & lower call strike it could be profitable. Don't like the unlimmited risk on the downside past the put though, makes me shudder if you get the direction completely wrong & the sp tanks.
> 
> *What would you defend such a move?*




You would want to flip your delta PDQ. To me, as discussed above, it seem to go against the concept of swing trading, ie get in, special forces style, take what profit you can and get out... and scurry back into hiding if they know you're coming.


----------



## wayneL (24 June 2009)

prawn_86 said:


> I thought this was an english site :



Not much English spoken where I'm living.  Almost all Italian and French, some Poles...

... lot's of Suth Ifricins... but that not really English, is it?


----------



## Grinder (24 June 2009)

wayneL said:


> You would want to flip your delta PDQ. To me, as discussed above, it seem to go against the concept of swing trading, ie get in, special forces style, take what profit you can and get out... and scurry back into hiding if they know you're coming.




night stalking is'nt my style, think I'll stick with master & commander where I can manage my vessels from afar.


----------



## mazzatelli1000 (29 June 2009)

wayneL said:


> Yes I like what Stuart Johnston calls the Non-Seasonal trade. i.e. sell options on the safe side of seasonal tendencies, with a strong reference to historical moves.
> 
> As commodities tend to stay in a defined range most of the time, it works well. Just have to avoid suicide seasonals, those times of the year when the counter seasonal move can be vicious... like when weather events can spawn black swans.




Awesome, thanks for sharing!!

It wasn't til recently I saw some research published about local vol surfaces for commodity options that piqued my interest. Up until now it was just equity/index and FX space
It looks like your using stat vol as your forward basis?! Ill continue exploring.

Maybe Ill take up a degree in meteorology just for these---LOL jk


----------



## wayneL (29 June 2009)

mazzatelli1000 said:


> Awesome, thanks for sharing!!
> 
> It wasn't til recently I saw some research published about local vol surfaces for commodity options that piqued my interest. Up until now it was just equity/index and FX space
> It looks like your using stat vol as your forward basis?! Ill continue exploring.
> ...




Here is the book I got that idea from Mazza: http://www.amazon.co.uk/Trading-Opt...=sr_1_1?ie=UTF8&s=books&qid=1246270316&sr=8-1

Stuie is an entertaining guy and there is some really interesting thinking in there.

*recommended reading IMO

Not really stat vol (athough structural vol a consideration), but straight out statistical info.

eg


What appears to be the minimum value for the commodity
When and where are the seasonal tendencies 
If the seasonal tendency fails, how much does it tend to move against it
What is the historical MAE against the current price in the time period in question
Can I get enough premium to justify a trade in a WOOM non-seasonal write
What is the suicide season where weather events can blow up the chart and possibly my written position (such as the possibility of frost in Brazil (making my machiatto more expensive) or hurricanes in florida etc)
ETC ETC

When the planets line up, straight out written options are such a high probability trade, it's almost immoral )

There is a chapter in the book on defence too, interestingly titled "Apocalypse Never". 

Those with a good sense of the absurd will get a few belly laughs too.


----------



## emilov (3 July 2009)

Hey, about that trade. It does make sense to do it like this but there is better. So you are doing a bull call spread and short put (both of which limit you on the upside, but not on the down side).

Why not instead turn it around and do a bull put and a long call. The bull put finances the long call, you have unlimited upside profit but limited loss on the down side. It's a protected collar so to speak.

My 2 cents


----------



## mazzatelli1000 (3 July 2009)

emilov said:


> Hey, about that trade. It does make sense to do it like this but there is better. So you are doing a bull call spread and short put (both of which limit you on the upside, but not on the down side).
> 
> Why not instead turn it around and do a bull put and a long call. The bull put finances the long call, you have unlimited upside profit but limited loss on the down side. It's a protected collar so to speak.
> 
> My 2 cents




What strikes are you playing with? Perhaps an example


----------



## emilov (3 July 2009)

ok sure, now follows the generic disclaimer about general advice and bla bla 

You can spin this quite using various strikes. Let's say TLS was trading at 3.35 (which is what it is trading for right this second) and you are convinced it is going to explode on the upside (it won't but lets not go there).

You could then sell a 3.36$ put, buy a 3.12 put (bull put spread) and buy a 3.36$ call (or a higher strike if you anticipate a strong move). You'll still end up with a debit for the whole trade (credit for bull put, debit for the call), but it will be small. As for expiry, you can go the current month (reacts faster, but time decay hitting it badly) but better give yourself more time, so next month. The max margin will be 24c per contract, partially offset by the bought call.

There is another much cooler way to spin it that almost zeroes your margin. You do the three legs but all the same strike, say 3.36$. But for the sold put you go one month further out, so bigger credit. As long as you get rid of it before the bought put expires the margin will be almost zero, after that it will kick in hard.

So when the stock takes off you make money on the call and on the bull put (which is a credit spread and gets smaller as time decays and stock moves up).

If you are really gutsy, drop the protection of the bought put, just buy a call and sell a put (reverse collar). But this will make the margin for the naked put run wild. So the protection gives you both, less margin AND protection from the unlimited downside loss.


----------



## mazzatelli1000 (3 July 2009)

emilov said:


> You can spin this quite using various strikes. Let's say TLS was trading at 3.35 (which is what it is trading for right this second) and you are convinced it is going to explode on the upside (it won't but lets not go there).
> 
> You could then sell a 3.36$ put, buy a 3.12 put (bull put spread) and buy a 3.36$ call (or a higher strike if you anticipate a strong move). You'll still end up with a debit for the whole trade (credit for bull put, debit for the call), but it will be small. As for expiry, you can go the current month (reacts faster, but time decay hitting it badly) but better give yourself more time, so next month. The max margin will be 24c per contract, partially offset by the bought call.




My Dissection:

The $3.36 short put and long call combo becomes a synthetic long. 
Combine that with a $3.12 put and you have a synthetic long call for $3.12

Extra transaction costs and even if the long $3.12 call was traded outright, tankage in vol line associated with bull deltas would still make me inclined to trade the spot.



emilov said:


> There is another much cooler way to spin it that almost zeroes your margin. You do the three legs but all the same strike, say 3.36$. But for the sold put you go one month further out, so bigger credit. As long as you get rid of it before the bought put expires the margin will be almost zero, after that it will kick in hard.




Possible dissections (if this is right long $3.36 June Call, long June $3.36 put, short $3.36 July put):
1) Reverse June/July Put Calendar $3.36 + long June call $3.36
2) June $3.36 straddle + short July $3.36 put

Either way, I would prefer vols to be high for this play due to back month vega, and possibly will have to gamma trade the front month longs. So not a swing trading vehicle IMO



emilov said:


> If you are really gutsy, drop the protection of the bought put, just buy a call and sell a put (reverse collar)




What strikes are you refering to here for clarification?
None of the above states you are wrong btw


----------



## emilov (3 July 2009)

You are correct, sold put & bought call => synthetic long (also called a reverse collar). Adding the bought put decreases your credit but it protects from higher margin and losses on the down side. The bull put itself helps to offset (at least partially) the time decay of the bought call.

So, if you do just the synthetic long with no protection, you either do both close to the money, or first out of the money. But since we don't have guaranteed stop losses here in Australia I find that strategy too risky for me, hence the protection.

(and of course, this thing works as a short too i.e. bear call + bought put)


----------



## mazzatelli1000 (3 July 2009)

emilov said:


> You are correct, sold put & bought call => synthetic long (also called a reverse collar).



Wrong
The strikes you have stated are $3.36 short put and long call - this is a synthetic long
A reverse collar is short an OTM put and long OTM call - an example would be short the $3 put and long the $4 call



emilov said:


> Adding the bought put decreases your credit but it protects from higher margin and losses on the down side. The bull put itself helps to offset (at least partially) the time decay of the bought call.




You would be purchasing a synthetic ITM call $3.12, not much time decay. The bull put creates that illusion.

Nice thinking though


----------



## emilov (3 July 2009)

Well, how you call it depends in where you learned it . Still, the idea is appealing, to reap higher rewards than with a straight call, less time decay and still a limited risk AAND the higher flexibility to massage the trade should it not kick ass, as it should.

The downside is much higher brokerage, especially for smaller trades.


----------



## mazzatelli1000 (3 July 2009)

emilov said:


> Well, how you call it depends in where you learned it . Still, the idea is appealing, to reap higher rewards than with a straight call, less time decay and still a limited risk AAND the higher flexibility to massage the trade should it not kick ass, as it should.
> 
> The downside is much higher brokerage, especially for smaller trades.




A Synthetic long is not the same as a reverse collar - your delta exposure would be different for starters - hence risk is different. A risk graph would clarify it.

I don't think you understand my point. Your first example as I understand it IS a long call.


----------



## emilov (3 July 2009)

I find that there is always a HUGE difference between a synthetic and the real thing. Synthetic long stock does NOT equal buying the stock at all. Your leverage is so much bigger! Even if my example is a synthetic long call, and the graph looks the same, it brings more cash to the table: the call makes money and the bull put makes money at the same time.

I understand the difference between doing the synthetic long stock and collar (the latter, as you describe it looking similar but with a "dent" in the graph). I like to think different terms, out of the money options (rev. collar) will yield better results if the move blows past their strikes, but it takes more time for the stock to get there. At the money (synth long stock) will react faster and profits can be gathered quicker.


----------



## mazzatelli1000 (3 July 2009)

emilov said:


> I find that there is always a HUGE difference between a synthetic and the real thing. Synthetic long stock does NOT equal buying the stock at all. Your leverage is so much bigger! Even if my example is a synthetic long call, and the graph looks the same, it brings more cash to the table: the call makes money and the bull put makes money at the same time.



So now put call parity doesn't hold in your world?

The synthetics will not be exact, but no HUGE discrepancies as you suggest
If there were you would arb it away!!!! Why bother with a convoluted spread

And risk graphs that are identical are not ....identical?

Using QQQQ
QQQQ is currently $35.56

The 35/36 Bull put spread is going for $0.44 credit and the $36 call costs $0.51 - TOTAL = Net debit of $0.07, margin requirement is $100
Total risk = $107

The 35 long call = Net debit of $1.08 = total risk = $108

You are adamant that the payoff is DIFFERENT because "the call and the bull put wins"

Let's say at expiration QQQQ finishes at $40
Your bull put spread will earn the full $0.44, while the call will be ($40 - 36) $4
Therefore $4.44 profit less the cost of the call ($0.51) = $393

The 35 long call will be worth ($40 - $35) = $5 profit less the net debit ($1.08) = $392

You forget that the long call itself already has intrinsic value



emilov said:


> I understand the difference between doing the synthetic long stock and collar (the latter, as you describe it looking similar but with a "dent" in the graph). I like to think different terms, out of the money options (rev. collar) will yield better results if the move blows past their strikes, but it takes more time for the stock to get there. At the money (synth long stock) will react faster and profits can be gathered quicker.




First you said


emilov said:


> You are correct, sold put & bought call => synthetic long (also called a reverse collar) .




Then you say 


emilov said:


> I understand the *difference* between doing the synthetic long stock and collar.




So are they different or not?

Prices as follows


----------



## mazzatelli1000 (5 July 2009)

Right or wrong, it just goes to show that high level dissection is important!!
Getting into positions that one thinks is superior and full proof turns out to be dissected to one basic position that you would otherwise not get into - Thank you Cottle!!!

I was spammed this in my email earlier today
Maybe it is the answer we have been looking for 

http://www.master*s*oequity.com/
Remove asterixes if you want to visit the site.
It seems to be the norm when searching for swing trading using options - all spruikers


----------



## wayneL (5 July 2009)

mazzatelli1000 said:


> Thank you Cottle!!!




He da man! 

Position dissection rules! OK! 



emilov said:


> I find that there is always a HUGE difference between a synthetic and the real thing. Synthetic long stock does NOT equal buying the stock at all. Your leverage is so much bigger!



You misunderstand the meaning of synthetic. Synthetic equivalence has nothing whatever to do with margin needed, cost or capital employed, and everything to do with the risk reward profile. In that sense, buying a call and selling the equivalent put, once dividends and cost of carry is accounted for, is precisely the synthetic equivalent of long stock, otherwise an arbitrage opportunity exists.

The only difference, assuming put/call parity (99.999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999999% of the time), is contest risk. i.e. commission and spread.



> I understand the difference between doing the synthetic long stock and collar (the latter, as you describe it looking similar but with a "dent" in the graph). I like to think different terms, out of the money options (rev. collar) will yield better results if the move blows past their strikes, but it takes more time for the stock to get there. At the money (synth long stock) will react faster and profits can be gathered quicker.




OK nomenclature confusion here. Regarding the "reverse collar".

First, let us consider what a collar is. It is a limited risk, limited reward strategy. AKA a synthetic bull call spread (or synthetic diagonal spread if different expiries are used). It is called a "collar" because both reward and risk is truncated at the respective strikes.

What is being described here (otm long call/short put has no truncation of risk and reward whatsoever, ergo, it is not a collar of any sort, much less a reverse collar. It is in fact a long "semi-stock". (ref Cottle page 26)

A reverse collar is a synthetic bear put spread involving stock. (eg short stock, short otm put, long otm call).


----------



## mazzatelli1000 (5 July 2009)

I like your/Cottles definition of collar and semi stock - let's use that!!!

There seems to be no consensus on collar/fence/risk reversal definitions

I've seen Baird describe the long semi stock as a bull fence, while a bull/long fence according to Natenberg is the synthetic bull call spread 

I took the interpretation of a reverse collar as the reverse of a collar...LOL if that makes sense?!?!

Either way Emilov's statement that the synthetic long and "semi long stock" being the same is like saying "straddle (also know as a strangle)" - I shouldn't be so persistent with this LOL


----------



## wayneL (5 July 2009)

mazzatelli1000 said:


> I like your/Cottles definition of collar and semi stock - let's use that!!!
> 
> There seems to be no consensus on collar/fence/risk reversal definitions
> 
> ...




Indeed.

Nomenclature can be a nightmare. 

Here are a couple of quotes from The Hidden Reality



			
				Charles Cottle said:
			
		

> A “fenced” position (+u / + lower strike put and short higher strike call) is best viewed in
> its simplest terms, namely, a bull spread. Manage the bull spread by watching either the long call
> spread or the short put spread, whichever is more liquid.






			
				Charles Cottle said:
			
		

> Collar is synonymous with ‘caps and floors’, tunnel, barrier, fence or squash, depending on what
> market it is traded..






			
				Charles Cottle - Glossary from The Hidden Reality said:
			
		

> FENCE: An option and stock position consisting of long stock, long an
> out-of-the-money put and short an out-of-the-money call, which
> emulates a bull spread. Alternatively, a reverse fence can be long stock,
> long in-the-money put and short in-the-money call which emulates a bear
> spread. All the options have the same expiration date.




Note Cottle also describes the reverse fence (collar) as the synthetic bear spread.


----------



## emilov (5 July 2009)

Wow fellas, I missed a large portion of the discussion here.

Firstly, a reverse collar, which consists of a bought out of the money call and a sold out of the money put is an unlimited risk (because of the sold put), unlimited profit (because of the bought call) trade, it has nothing to do with a bull call spread (the latter being a bought call and a sold call at a higher strike and limited risk, limited profit strategy).

Secondly, when I say I understand the difference etc., I clarified in the brackets after, that I understood it by your definition. To me, whether you buy call, sell put at the money or slightly out of it, it's the same strategy that I call synthetic long stock (or reverse collar, as per Anthony J. Saliba). So it's a question of definition.

Thirdly, I strongly disagree in synthetic long stock as described by me being equivalent to buying the stock. Even if they have the same graph, and the same *absolute* payoff, the fact that the options position is so much more leveraged makes all the difference. If I bought any stock I'd have to put a lot of cash in the market and so the cash on cash return is very, very low, not worth it for me as a trader. So, it's again a question of definition. I don't care about theoreticals but only about the fact that such an options trade allows me to go long a stock without having all the cash to actually buy it (and with the added protection of a bought put it even becomes a limited risk, unlimited profit trade). And as I said, leverage is the reason why I am in options in the first place (that and flexibility). Otherwise I'd just be buying (or shorting) stock.

Cheers, Emil


----------



## wayneL (5 July 2009)

OK Emil.

Your the expert man.


----------



## wayneL (5 July 2009)

Reverse Collar - As discussed different folks see it as different things.

I prefer the synthetic bear put to be called a collar and the long call/short put be called semi stock.

Why? Because of consistency of understanding.


As I said before, a "traditional" collar is called a collar because a it "collars" the price action, putting a floor under losses and putting a cap on profits. It is called a fence for the same reason. 
It makes sense to me that a "collar" with  the adjective "reverse", would still "collar" profits and loss, i.e. limit loss and cap profit, but in reverse. In other words a collar with negative delta rather than positive delta. In other words, a mirror image in the same way that a "reverse" ratio spread (AKA back spread) is the mirror image of a ratio spread.
IF we call the short put/long call combo a reverse collar, what do we then call a long put/short call combo (A reverse reverse collar )... what do we call the synthetic bear spread i.e. the reverse fence/collar as defined by God... errrr, I mean Charles Cottle? It then adds to confusion.

That said, others will still use the illogical nomenclature that Emil and others use. It's not a perfect world is it? I guess those of us on the side of logic will have to live with that.

Emil, regarding synthetic long stock. There is not an option professional in the world who would agree with you. You are wrong, afield, amiss, askew,  inaccurate, incorrect, mistaken, خطأ, 错误, verkeerd, mal, Unrecht, λανθασμένος, torto, 悪事, 부정, krzywda, erro, неправда and fel. 

Leverage is IRRELEVANT when considering synthetic equivalency. Why? 

Because synthetic equivalence is about risk profile, not margin/cost.
Some market participants are able to use less margin than others. Not everybody has to cough up the full cost of shares like most retail traders. Research the tern "hair cut" and you'll see what I mean.

Even retail traders have differing margin requirements. My account is big enough to be subject to SPAN margining (AKA portfolio margining). I can enter a covered call under margin rules, for much less than non-SPAN margining. An example is at http://sigmaoptions.blogspot.com/2007/01/new-margin-rules-for-option-positions.html



> COVERED WRITE
> 
> Position
> Long 500 IBM @ $91.25
> ...




Under your assumption. A covered call under strategy margin rules is not the same as a covered call under SPAN margining, because of the leverage. Yet there is no question that a covered call IS a covered call... is there?

That is plainly ludicrous.


----------



## wayneL (5 July 2009)

Here's another example of synthetic equivalence:

Buy 1 x (lets say stock price is @ $50) $50 call for $2.50
Buy 1 x $50 put for $2.50

Cost of strategy and maximum risk is $500 (using a contract size of 100)

Everybody knows this as a long straddle.

Now consider the following

Short stock @ $50
Buy 2 x calls for $2.50

Cost $5,500 with maximum risk of $500

The second strategy IS A SYNTHETIC STRADDLE. Yet according to Emil's logic, it's not a synthetic straddle at all because of the leverage (or lack thereof).

WTF?

Now, My point about SPAN margining applies here. The straddle costs $500, yes? But under SPAN margining, what's my capital outlay on the synthetic straddle?

Yep! You guessed it! It's $500 because that is maximum risk.

A more clearer destruction of the "synthetic equivalence doesn't count because of leverage" argument, there will never be.

Hence, it is inarguable that long call and short the corresponding put IS a synthetic long.

Once again, l*everage is irrelevant to synthetic equivalence*.

Amen


----------



## mazzatelli1000 (5 July 2009)

wayneL said:


> OK Emil.
> Your the expert man.




Sure is

http://www.articlesbase.com/finance-articles/beginner-trader-making-50k-in-first-two-months-672473.html

http://www.investing-in-property.com/ - surprised you haven;t make $100K from this and qualify for portfolio margining and trade even more synthetics!!

Looked at the blog, it seems there are others that have already tried to get through to him about synthetics.

Lost cause IMHO

_To appear wise, one must talk;
To be wise, one must listen._

Best advice I have been given.


----------



## emilov (5 July 2009)

Dear Wayne, thanks for keeping the discussion on an objective level, unlike others who chose to get personal just because someone dares to awake the appearance of disagreeing with their views.

A slight comment on SPAN, the ASX and clearing participants use TIMS which is quite different in margin calculation. I've seen tests and ran calculations myself which produced quite a different results. Just fyi, this is irrelevant for this discussion. 

It seems like the discussion is going in two directions, definitions and strategy. I will address definitions only shortly, makes no sense otherwise. I've quoted from a book, if you don't agree, complain on the internet, maybe the author will care.

What I definitely like do discuss is option strategies. However you call it a bought call and a sold put, that is synthetically equivalent to long stock, I've never denied that. This is theory to me though, I'm a practitioner who does around 10 trades every month. 

In practice if I had 10k to invest, I could buy the stock if I had the view it was going to rise. If the stock goes up by say 5% I've made 5% on my money (excluding brokerage, slippage).

If I implement the trade with options, a synthetic long stock and I was to risk 10k (say stop losses were guaranteed) if the stock goes up by 5% I'll make quite a bit more percentage wise.

This is ALL I'm talking about, nothing else.


----------



## warezwana (8 July 2009)

Trembling Hand said:


> Добро пожаловать comrade




*ха ха ... теперь ты говорите на языке я понимаю*



wayneL said:


> длиной живет виток, друг.




* you just said something like 'long live revolving* (_as in going around_), *my friend* your translator should have said something like... 
'Да здравствует революция, друг!'


*But to this Option....*




emilov said:


> Hey, about that trade. It does make sense to do it like this but there is better. So you are doing a bull call spread and short put (both of which limit you on the upside, but not on the down side).
> 
> Why not instead turn it around and do a bull put and a long call. The bull put finances the long call, you have unlimited upside profit but limited loss on the down side. It's a protected collar so to speak.
> 
> My 2 cents




*Sounds interesting!!! yet complicated  Is this best suited to a directional trade rather than sideways?*



wayneL said:


> Emil, regarding synthetic long stock. There is not an option professional in the world who would agree with you. You are wrong, afield, amiss, askew,  inaccurate, incorrect, mistaken, خطأ, 错误, verkeerd, mal, Unrecht, λανθασμένος, torto, 悪事, 부정, krzywda, erro, неправда and fel.




*Apart from not agreeing on (if I understood it all) leverage on a synthetic trade is this basically a free trade? but the main thing im wondering is how to even try placing something like this  wow... got me very curious. placing a spread ok, easy enough but taking on a call or put to the side of it really gets me thinking way too hard.*


----------



## mazzatelli1000 (8 July 2009)

warezwana said:


> *Sounds interesting!!! yet complicated  Is this best suited to a directional trade rather than sideways?*




That has already been dissected/simplified into a long ITM call.
Directional: bullish bias


----------



## wayneL (8 July 2009)

warezwana said:


> * you just said something like 'long live revolving* (_as in going around_), *my friend* your translator should have said something like...
> 'Да здравствует революция, друг!'[/B]




Damned English homonyms  (Complaint letter fired off to systransoft.com)



> *But to this Option....*
> *Sounds interesting!!! yet complicated  Is this best suited to a directional trade rather than sideways?*



You have to read the ensuing posts. As Mazza pointed out, it dissects into an ITM long call. So just buy the call to save on commisions... same trade.

If people would only use a model, such as Hoadley's software, or use position dissection, it would be immediately apparent.




> *Apart from not agreeing on (if I understood it all) leverage on a synthetic trade is this basically a free trade? but the main thing im wondering is how to even try placing something like this  wow... got me very curious. placing a spread ok, easy enough but taking on a call or put to the side of it really gets me thinking way too hard.*




There is no such thing as a free trade. Even if there is no nett debit or credit, there is still margin to put up. Risk is always best measured by the Greeks.

Complicated, multilegged positions can be fun and there are unlimited possibilities. But they need to suit specific goals rather than be an end in itself.


----------



## emilov (8 July 2009)

What wayne means is that when you buy options that you offset by selling other options you might not incur a debit (you might even get away with a credit). This still means that the clearing participant will charge you heaps of margin for the sold option (because it is uncovered, or naked). This margin is a security deposit they will withdraw from your trading account (but it can be covered with stock too). The margin will variate as the stock price fluctuates. If the stock price moves unfavorably to you and your margin increases beyond the amount of your collateral you'll get a margin call from the broker wanting you to put more money into the trade (or close it). If you don't you'll be closed out.

To all the mathematicians in this thread, you are saying that a bull put plus call is like a straight ITM call, yes? What strikes are we talking about please? I genuinely want to know this, so please remain constructive if possible.

Because I did test it in practice as I trade very actively. I compared a bull put spread, a straight call and the above trade. Here are the results (the LGL trade). LGL on that day was at 2.68 (the 16th, not 15th as it says). Even though they were closed on different days (the call earlier) the price of the underlying was similar, around 2.95 (yeah should have let it run a bit more, I know ). Based on your theory the straight call and the protected strategy from above should yield similar results (the complex strategy should have been even worse because of 6 more days time decay), but they don't, the protected one yielded much better profits (percentage wise, similar capital at risk, number of contracts differs of course) in the example I'm providing.

This is why I want to know, what strikes are we talking about (could you refer to my example)?


----------



## wayneL (9 July 2009)

emilov said:


> To all the mathematicians in this thread, you are saying that a bull put plus call is like a straight ITM call, yes? What strikes are we talking about please? I genuinely want to know this, so please remain constructive if possible.




If the bought call is correspondent (ie same strike and expiry) to the short put (as discussed previously), you have a synthetic long. Because you have a bought put at a lower strike, what you have is a protective put strategy i.e. Long stock (synthetically) plus a long put.

A protective put strategy is a synthetic long call at the strike of the long put.

So when it all boils down you have a long call at the lower strike.



> Because I did test it in practice as I trade very actively. I compared a bull put spread, a straight call and the above trade. Here are the results (the LGL trade). LGL on that day was at 2.68 (the 16th, not 15th as it says). Even though they were closed on different days (the call earlier) the price of the underlying was similar, around 2.95 (yeah should have let it run a bit more, I know ). Based on your theory the straight call and the protected strategy from above should yield similar results (the complex strategy should have been even worse because of 6 more days time decay), but they don't, the protected one yielded much better profits (percentage wise, similar capital at risk, number of contracts differs of course) in the example I'm providing.
> 
> This is why I want to know, what strikes are we talking about (could you refer to my example)?




Emil,

1/ This is what you traded.

Example 1 - *FEBRUARY* 2.50 long call

Example 2 - *JANUARY* 2.50/2.75 bull spread

Example 3 - Synthetic *JANUARY* 2.50 long call with one long call component (the 2.75) exited early.

Example 3 could have been constructed by simply going the long call, shorting the 2.75 call on 23/1, which morphs it to a 2.50/2.75 bull spread. 

2/ As the 3rd trade was morphed, it cannot be directly compared to the other two.

Edit to Add: *Emil!* I thought the figures stunk, but I missed something very important. You're comparing a *February* expiry (the natural long call) with a *January* expiries (the vertical and the synthetic long call) 

APPLES AND ORANGES!!!!!!!


----------



## emilov (9 July 2009)

Ahh thanks for clarifying wayne, now I see my "mistake" too. Next time I do this I'll try matching months (and strike as you suggested). But hey, it's a good mistake to make, right, if it makes more money?


----------



## sails (15 August 2009)

lol - what an entertaining thread... this is fun catching up on missed time!


----------



## emilov (15 August 2009)

well, wayne and I discussed the strategy of mine on my blog. and, well we agreed that neither of us was really wrong, we were talking about different things. my strategy, when dissected does NOT equal an ITM call. it just equals what it is, a bull put spread plus an added call. just like with the synthetic long stock, the reason for doing it (at least for me) is so that the sold put finances the bought call. only in my case I'm financing the bought call with a bull put spread. for sure, I get less credit with the bull put spread (compared to a sold put) but my risk on the down side is limited.

ah, and just fyi, the trade in question ended up being profitable


----------



## wayneL (15 August 2009)

emilov said:


> well, wayne and I discussed the strategy of mine on my blog. and, well we agreed that neither of us was really wrong, we were talking about different things. *my strategy, when dissected does NOT equal an ITM call.* it just equals what it is, a bull put spread plus an added call. just like with the synthetic long stock, the reason for doing it (at least for me) is so that the sold put finances the bought call. only in my case I'm financing the bought call with a bull put spread. for sure, I get less credit with the bull put spread (compared to a sold put) but my risk on the down side is limited.
> 
> ah, and just fyi, the trade in question ended up being profitable




Eh? What nonsense is this?

*That* trade was not a synthetic call.

The trade Mazza and I said IS a synthetic call, as discussed in this thread, IS INDEED a synthetic call.

To quote what I said on your blog:



> That will teach me to check details. Here's me thinking you have a synthetic ITM long call like you said, and like we discussed at ASF; but you don't have that at all.
> 
> This doesn't dissect out to anything but exactly what it is, a credit spread with an OTM call superimposed on top. It's nothing close to a synthetic ITM call.




It was you who wrongly said *that* trade was a synthetic call:



> While mathematically this kind of trade's payoff is close to a straight in the money call...




Stop arguing, start listening, you might learn something

PS - Glad the trade worked out for you, but every trade has the capacity to profit. The sticking point is understanding the risks. This is discussed in the video I did on credit spreads. Most do indeed profit, it's the magnitude of the losses that make a difference.


----------



## emilov (15 August 2009)

Why did I even bother to post back only to get hammered on again? Yes I agreed, only to set an end of the argument. You see, it might be as you say, I never cared if it were. I discussed the strategy I applied the way I use it. If you are smarter, you can obviously do better, good on you. All I know is that I can explain this thing to myself, I have a way of understanding it so that it works as I expect it (which btw. has nothing to do whether it was profitable trade or not, that was because the direction of the stock happened to go my way).

Learn something?! Learn what? That you have a way of understanding (and explaining) of options I cannot follow? Yes I got that, many many times thank you very much. 

It is sad that the majority of people seem to believe that that being smart equals making profits. See, I'm smart to know that it is not true. If it were, all Nobel price winners would be millionaires. I know a 70 year old guy, and the age is starting to show, and he does not get options too well. Still he trades them and makes money. So, yes I admit it, I got confused by your way of dissecting the strategy and was too quick to settle. Does it mean it does not work or it won't make me money? Nope. And I'm in this game to make money, I don't know your agenda.

BTW, Wayne, I just saw your videos. Where did you get those idiotic statements (90% success for option sellers, mate, hilarious ), please tell me the website.


----------



## mazzatelli (15 August 2009)

sails said:


> lol - what an entertaining thread... this is fun catching up on missed time!




LOL
I got called a "self righteous, arrogant bastard" in the process 

Hope all is well M!!! Have you got your beautiful view back??


----------



## wayneL (15 August 2009)

emilov said:


> Why did I even bother to post back only to get hammered on again? Yes I agreed, only to set an end of the argument. You see, it might be as you say, I never cared if it were. I discussed the strategy I applied the way I use it. If you are smarter, you can obviously do better, good on you. All I know is that I can explain this thing to myself, I have a way of understanding it so that it works as I expect it (which btw. has nothing to do whether it was profitable trade or not, that was because the direction of the stock happened to go my way).
> 
> Learn something?! Learn what? That you have a way of understanding (and explaining) of options I cannot follow? Yes I got that, many many times thank you very much.
> 
> It is sad that the majority of people seem to believe that that being smart equals making profits. See, I'm smart to know that it is not true. If it were, all Nobel price winners would be millionaires. I know a 70 year old guy, and the age is starting to show, and he does not get options too well. Still he trades them and makes money. So, yes I admit it, I got confused by your way of dissecting the strategy and was too quick to settle. Does it mean it does not work or it won't make me money? Nope. And I'm in this game to make money, I don't know your agenda.




Position dissection/synthetics is not my way, it's the correct way. My agenda here is to help people understand options. It can be confusing and discussion helps. I do this for free. I like discussing them and it also helps me. 

The problem is that ersatz experts confuse the issue. Arguing that a synthetic long call is not a synthetic long call, even when it is proven mathematically, is straight out muppetry... as is arguing that a vertical with a OTM call superimposed at a different strike IS a synthetic long call.

It confuses people.

If your goal is to make money, perhaps you should be more open to said discussions, as some simple maths extrapolated from your own words show that you haven't done so overall.

If you really want to get hammered, go and discuss your views at elitetrader where a few ex MMs and insto traders hang out.


----------



## emilov (15 August 2009)

Ah Wayne,
We should so get together for a beer or something , do you live in Australia? You certainly sound Australian.

See, I'm doing this for free too (I don't sell a course or promote one). The sole reason I have that blog (and/or post here) is because a few traders I know asked me what I do and how, constantly. I wouldn't have even done it and continued to trade privately  (as opposed to publicly). I used to sort my trades elsewhere but I do find the blog convenient. It is absolutely not my intention to educate, merely to report my activities, your goal there seems higher and, I must say a little futile.

There is no doubt in my mind that I could learn a lot from you about options (next to the few books I have read on the subject). The reason I don't go there is because I prefer to keep things simple, complicated in trading does not equal better, you should know this: too much info and distractions ruins your mojo. 

Analogy: I don't need to be a mechanic to be able to drive a car, a basic knowledge will get me from A to B safely. I got burned in the past because, to continue the analogy, I was driving at too high speeds without wearing my seat belt.

I agree with almost everything you said in your videos except for one thing: IV, strikes and calculating the chance of success. Yes, mathematically you are correct (I trust you are, I didn't do the numbers). But in my humble opinion intangible things like trend/support/resistance (which should determine the strikes and thus the risk profile) add to the chance of success. Maybe I don't have your experience but mine, as a person who has traded actively for almost 2 years tells me so.


----------



## sails (15 August 2009)

emilov said:


> ...
> Analogy: I don't need to be a mechanic to be able to drive a car, a basic knowledge will get me from A to B safely. I got burned in the past because, to continue the analogy, I was driving at too high speeds without wearing my seat belt...




Agree you don't need to be a mechanic to drive a car, but you absolutely do need to know the road rules.  Trading options without knowing the rules (aka greeks, synthetics, etc) is risky business.

I seem to remember you complaining some time ago about your STO call when the premium plumeted ex rights (I think that was the corporate event).  That was a prime example of trading options without understanding how options are priced.


----------



## emilov (15 August 2009)

Sails, that trade was an ITM call. The fact that I lost on it had nothing to do with me not understanding option pricing. And who says I don't, if I ever get a minute free of my sweet but very demanding 2 month old daughter I'll finish coding my options calculator (with pricing projections based on any greek variation). FYI, that was my one and only losing month since November last year and the loss was about 1k.

And the fact that the event happened which dropped the stock (+trading halt) would have wrecked any bullish strategy (although I know people who had a bull put spread on it and rolled it out and ended up breaking even on the next month). What you don't mention is that I risked very little on that trade, so the loss was small: which is in line with Wayne's statements about proper money management & risk of ruin.

Again I'll disagree that knowing things like rho will help me much in my trading. Delta, gamma and theta do, for sure. Still, I understand how time decay works without calculating the theta to the 5th digit, I understand what delta of 1 means as opposed to .5 (ATM) and, would you believe it, I understand even gamma neutral trading strategies (McMillan).

I don't believe that the latter is something that will improve on my trading though. I use strategies that have worked for me many times over.


----------



## wayneL (16 August 2009)

Emil,

I don't think anyone gives a **** what strategies you use or don't use, whether directional or neutral, or even whether you win or lose.

What is important for discussion here, is theory and process; that what is presented here is correct, so that people can go away and trade their own way, but fully cognizant of the mathematical relationship between stock and options and risks as measured by the Greeks.

That's why we considered the earlier discussion on synthetics so important.



emilov said:


> Again I'll disagree that knowing things like rho will help me much in my trading.




Ignoring Rho is luxury we've had for some years, though I think anyone loaded to the gills with LEAPS calls might disagree, what with the collapse in interest rates etc.

However, who knows what happens in the future. When interest rates eventually become more volatile, Rho might be a major consideration with some strategies.


----------



## emilov (16 August 2009)

So, what about that beer Wayne ?

In school I learned differential equations, and yet I live my day to day live without them just fine. I don't remember much of it anyway.

I'm sorry should I have appeared to sound rejectful of the math side of options. I definitely don't think it's wrong, please don't make it look that I do. Greeks most certainly have their place and if people want to use them as their basis for trading, they should (I absolutely agree that it is a very objective way to trade).

To me trading is more of an art, you can know all the math and still lose. Traders that don't do options would agree. I don't use greeks (so much, I do look at delta for ratio call spreads) and it works for me. I have a feel about options (which surely can be quantified with greeks) and it works for me. And in any book I read and every trader I spoke with it (and I know a few who are quite experienced and successful) say to find a way of trading that does that.

(I don't trade LEAPs (I think they're called LEPOs here in Oz), my trades are very seldoml longer than a month, so yeah interest rates usually remain the same during that time)


----------



## sails (16 August 2009)

With only one or two contracts, Rho isn't going to have as much $ effect, especially if the position is close in time.  However, the combination of larger positions and going further out in time, Rho can make more difference than you might think.  While not as significant as some of the other greeks, but IMO every dollar counts if you are running trading as a business.


----------



## wayneL (16 August 2009)

emilov said:


> So, what about that beer Wayne ?




I'm up for it if you can make it to the Rose and Crown on the Wimbledon Village High Street 

http://maps.google.co.uk/maps?f=q&s...d=SZUttoQH1eqBSPEbny3sSg&cbp=12,337.4,,0,4.17


----------



## sails (16 August 2009)

emilov said:


> ...To me trading is more of an art, you can know all the math and still lose. Traders that don't do options would agree. I don't use greeks (so much, I do look at delta for ratio call spreads) and it works for me. I have a feel about options (which surely can be quantified with greeks) and it works for me. And in any book I read and every trader I spoke with it (and I know a few who are quite experienced and successful) say to find a way of trading that does that.




While understanding the greeks that fuel fluctuations in option pricing doesn't guarantee profits, it sure can help prevent unnecessary losses.  It also helps to hunt out the opportunities which would otherwise go unnoticed.  



> (I don't trade LEAPs (I think they're called LEPOs here in Oz), my trades are very seldoml longer than a month, so yeah interest rates usually remain the same during that time)




Oh dear...   LEAPS AND LEPOS are absolutely NOT the same thing.


----------



## wayneL (16 August 2009)

sails said:


> With only one or two contracts, Rho isn't going to have as much $ effect, especially if the position is close in time.  However, the combination of larger positions and going further out in time, Rho can make more difference than you might think.  While not as significant as some of the other greeks, but IMO every dollar counts if you are running trading as a business.



Yep, exactly.

I'm thinking of strategies like calenders or diagonals where you may have quite a few contracts on. Rho is going to have a vega-like effect if % rates start moving around.

Emil,

A LEAPS is different to a LEPO. A LEAPS is just a long term ordinary option. <SNAP>


----------



## emilov (16 August 2009)

sails, for sure. if I was to trade longer term options I'd need to learn more about the pitfalls (only one of them being interest rate changes, and a few of them at that

(sails they are not? well I've no idea about these, although I could have googled it . anyway, I don't trade them, just like I don't trade CFDs and other vehicles I haven't read enough about)

agree on the opportunities, surely I miss a lot of them. but hey, a famous real estate investor, Dolf de Roos says that the deal of a century comes every week and I find that this is even more true for the stock market.

wayne, mate, next time I'm in Europe, most definitely . Right now I live in Brisbane, Australia (and trading the US market would mean me getting up at 12pm at night, that is one of the reasons I stick with the Australian market).


----------



## village idiot (16 November 2010)

wayneL said:


> I'm up for it if you can make it to the Rose and Crown on the Wimbledon Village High Street
> 
> http://maps.google.co.uk/maps?f=q&s...d=SZUttoQH1eqBSPEbny3sSg&cbp=12,337.4,,0,4.17




holy ****, I used to drink there back in the eighties and early nineties. I had a girlfriend who lived right round the corner, and then a few years later I worked for a while down in wimbledon (girlfriend by now gone) and we used to get up the hill to the rose and crown on many an occasion after work.

In other SW London highlights, once had a curry in the Rawalpindi  and Martina Navratilova was eating at the next table. 

Making me all nostalgic, small world


----------



## mazzatelli (16 November 2010)

village idiot = Necromancy! Funny thread to read.


----------



## village idiot (16 November 2010)

now I've had to look up necromancy;


Necromancy (pronounced /ˈnɛkrɵmÃ¦nsi/; Greek νεκρομαντεία nekromanteia, via Latin necromantia) is a form of magic in which the practitioner seeks to summon the spirit of a deceased person, either as an apparition or ghost, or to raise them bodily, for the purpose of divination.


but I still dont get it ......


----------



## cutz (16 November 2010)

village idiot said:


> but I still dont get it ......




If you like options have a read of the thread from the beginning, it's quite good.


----------



## wayneL (17 November 2010)

village idiot said:


> now I've had to look up necromancy;
> 
> 
> Necromancy (pronounced /ˈnɛkrɵmÃ¦nsi/; Greek νεκρομαντεία nekromanteia, via Latin necromantia) is a form of magic in which the practitioner seeks to summon the spirit of a deceased person, either as an apparition or ghost, or to raise them bodily, for the purpose of divination.
> ...




It is over a year old. :


----------



## village idiot (17 November 2010)

cutz, yeah i did, and it is, thanks


----------



## wayneL (17 November 2010)

village idiot said:


> holy ****, I used to drink there back in the eighties and early nineties. I had a girlfriend who lived right round the corner, and then a few years later I worked for a while down in wimbledon (girlfriend by now gone) and we used to get up the hill to the rose and crown on many an occasion after work.
> 
> In other SW London highlights, once had a curry in the Rawalpindi  and Martina Navratilova was eating at the next table.
> 
> Making me all nostalgic, small world



Yeah the missus and I are missing England big time.

Did you ever get over to the Hand in Hand on the other side of that first open bit of the common? http://maps.google.co.nz/maps?hl=en...esult&ct=image&resnum=1&sqi=2&ved=0CBkQnwIwAA

That was our watering hole most times. Our mutt was allowed in and they had dog treats for the regulars (dogs that is ). A few of the players used to go there from "The Championships".


----------



## village idiot (17 November 2010)

yes i did go there but only on a couple of occasions. If i remember rightly it had a large open grassy area out the front which was great for a summer evening drink. 

I havent been to UK since 2004, but we are heading off there for six weeks in three weeks time, visiting family and friends. (my wife is english, and although I am NZ born and brought up in oz, i lived in england for 18 years, incl the 3 working in wimbledon). 

I plan to spend most of my time inside english pubs drinking warm beer round the fire..........


----------



## wayneL (17 November 2010)

village idiot said:


> yes i did go there but only on a couple of occasions. If i remember rightly it had a large open grassy area out the front which was great for a summer evening drink.




That's the one. 

Ahh how nostalgic.


----------



## graexx (18 August 2013)

It seems you are asking strangers for suggestions on options strategies. Wouldn't it be safer to develop your own skill and knowledge by either paying for professional guidance or reading material from proven experts - in my experience nothing substitutes for developing your knowledge through hard study where the foundation is supplied by proven experts. After that you have to trust your own expertise and really go for it - trading and investing is a lonely game. You'll lose money if you try to turn your trading into a social experience by seeking casual advice from unknown sources.


----------

