Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings

CHAPTER 12

What Are Synthetic Options Positions?

A synthetic options position is when two or more trading instruments are combined to emulate another financial instrument. In this chapter, we will examine various ways this can be done.

■ Synthetic Long Stocks

Buying a call and selling a put with the same strike price and the same expiration date creates a synthetic long stock position. As the price of the stock increases, the call will rise in value and the put will fall. This total change in the prices of the call and put will mirror that of just owning the actual stock. The delta of this trade will be very close to 100. This position has the advantage of costing much less than owning actual stock. The disadvantage of this position is a limited life-span and, since it is not long stock, the owner of this combo will not benefit by receiving the dividend if there is one. If AAPL is trading $525 and I buy the December 525 calls for $25 and sell the December 525 puts for $25, I own this stock for $525, but would without the capital outlay of $52,500. The margin for the “combo” strategy would be the same margin of long $2,500 in calls and being short naked puts in AAPL. In figuring out this combo price, interest rate and dividend would be factored in as well. In general, if I quoted this trade with a floor broker, the market makers would know the cost of carry, so in theory I would have to add that to the price of the combo to offset the borrow cost of the stock purchase from the ...