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Buying Deep ITM vs Synthetic Long trade.....
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Buying Deep ITM vs Synthetic Long trade.....

  #1 (permalink)
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Buying Deep ITM vs Synthetic Long trade.....

I have gone over the comparisons of buying a Deep ITM call ( with a 1.00 Delta ) vs buying a Long Synthetic Long

To compare Apples to Apples,
we would have to buy the Strike for the Deep ITM call, whose Delta is the first to be at 1.00 Delta
And then we would buy the synthetic call ( assuming a 20% Required Margin ) of the Stock price

EXAMPLE:

Stock at $80

Deep ITM call....
$65 ITM costs $17 with a delta of 1.00 and is 45 days till expiration ( $17 x 1 contract = $1,700 )

Long Synthetic....
20% ( required Margin ) x $80 ( the price the stock is trading at ) = $16
$16 x 1 contract = $1,600 + Debit of say $1 x 100 ( 1 contract ) = $1,700

So given the above example, these two trades are almost Identical

My question is, which would be more beneficial to trade and why ?

Both scenarios will " technically " give us a $1 for dollar profit/loss for each $1 that the stock moves


Thanks for the help , much appreciated - Michael

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  #3 (permalink)
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mdsvtr View Post
I have gone over the comparisons of buying a Deep ITM call ( with a 1.00 Delta ) vs buying a Long Synthetic Long

To compare Apples to Apples,
we would have to buy the Strike for the Deep ITM call, whose Delta is the first to be at 1.00 Delta
And then we would buy the synthetic call ( assuming a 20% Required Margin ) of the Stock price

EXAMPLE:

Stock at $80

Deep ITM call....
$65 ITM costs $17 with a delta of 1.00 and is 45 days till expiration ( $17 x 1 contract = $1,700 )

Long Synthetic....
20% ( required Margin ) x $80 ( the price the stock is trading at ) = $16
$16 x 1 contract = $1,600 + Debit of say $1 x 100 ( 1 contract ) = $1,700

So given the above example, these two trades are almost Identical

My question is, which would be more beneficial to trade and why ?

Both scenarios will " technically " give us a $1 for dollar profit/loss for each $1 that the stock moves


Thanks for the help , much appreciated - Michael

The way I see it:
The difference lies in Theta and Gamma and bid/ask spread. Even in the most efficient market...say SPY for example. Once you get that far in the money where you are essentially paying very little to almost not any extrinsic value the bid/ask spread is very wide. That is where you are going to get hit hard. The mid price you are looking at may look like 16$...but look at the difference between the actual bid and ask. Probably dollars apart. You will not get filled at a fair price...the markets are very thin out there...low open interest and less volume. The market is highly inefficient at that point. Also keep in mind that the further you get away from "at the money" the less efficient the pricing model is.

Also if the price moves against you the deltas will change...they are not constant. They only apply to that moment in time. And the closer you get to expiration the higher your Gamma risk will be...Meaning the rate of change to the deltas by price movement starts to spike dramatically in the last 7 days to expiration.

If you want a synthetic long...sell an out of the money put. Basically a synthetic covered call but you gain theta every day. And there are a lot of underlyings with efficient prices out to 15 deltas.

With options the advantage you are looking for besides leverage is in the ability to cap your gains, collect premium and/or reduce your cost basis.

And that's....the way I see it.

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  #4 (permalink)
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ACstudio View Post
If you want a synthetic long...sell an out of the money put. Basically a synthetic covered call but you gain theta every day. And there are a lot of underlyings with efficient prices out to 15 deltas.

This is interesting, especially the bolded part. Could you give an example of what you mean by an efficient price with 15 deltas?

Thanks

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  #5 (permalink)
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TGoat View Post
This is interesting, especially the bolded part. Could you give an example of what you mean by an efficient price with 15 deltas?

Thanks

SPY DEC14 193 Put ....bid .82/ask .86. Means the strike nearest to -.15 deltas for SPY is the DEC 193 put....and the bid ask spread is only .04 wide. So you might be able to get a fill around .84 or even .85. Then only giving up 1 or 2 cents on the fill.

When you see a 200$ product where the options are less than a nickle wide past the 1 standard deviation move....that's pricing efficiency. You can thank the HF Traders for that....it rocks.

Then look at CROX trading for 12.59....the first out of the money strikes are .10 wide and have low open interest.....you would have to give up at least 5$ per lot....and maybe get filled. Not where you want to be as an active trader. Imagine if what open interest it has fell out overnight and it widens out .20 or .30....makes it hard to take profits. We need every advantage we can get. The people on the other side of these trades or slick....and they'll snatch you for a penny every time if you let them.

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  #6 (permalink)
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ACstudio View Post
SPY DEC14 193 Put ....bid .82/ask .86. Means the strike nearest to -.15 deltas for SPY is the DEC 193 put....and the bid ask spread is only .04 wide.

OK, but a question. Is -.15 deltas equal to 1 standard deviation? If not, why 15 deltas, why not 10 or 20, etc.? What is 15 deltas telling you?

Thanks

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TGoat View Post
OK, but a question. Is -.15 deltas equal to 1 standard deviation? If not, why 15 deltas, why not 10 or 20, etc.? What is 15 deltas telling you?

Thanks

Delta is the options greek used to describe directional risk. However if you look at the options pricing it plays right along with"Probability of In The Money" (ITM). In efficiently priced markets these numbers are very accurate....they have to be...or it wouldn't work.

http://courses.ttu.edu/rreddick/images/law/bell_curve.gif

So you can see a 1 standard deviation is 34% in either direction from the midpoint or current price. Means that you can expect that given current volatility the expected move for DEC exp will have the price above 193 68% of the time. And that is also where 15 deltas are. So if you short the 193 put for DEC you are synthetically long 15 shares of SPY for that moment with a better than (because of the credit received) 68% chance of not losing money. But that number changes from day to day but that's the game we are playing.

If you look at the first in the money and the first out of the money options deltas or Probability of ITM and add them together they will usually add up to 1 or 100. Means if you play at the money you have about about a 50/50 shot up or down.

If you want to know how the CBOE comes up with those numbers you'll have to Google it. But it involves volatility and time.

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Go to tastytrades.com,they explain you very efferently,and professionally , no need to listen to any crap,or quess

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ACstudio View Post
The way I see it:
If you want a synthetic long...sell an out of the money put. Basically a synthetic covered call but you gain theta every day. And there are a lot of underlyings with efficient prices out to 15 deltas.

With options the advantage you are looking for besides leverage is in the ability to cap your gains, collect premium and/or reduce your cost basis.

I don't see how capping your gains is an advantage, which is what you will be doing if you sell put instead of long synthetic/call.

I don't think you should sell puts to replace long call/stock when your view is very bullish.

But if you must sell puts to have theta on your side, I would sell ITM puts instead of OTM puts as its closer to a long call/stock position.

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k20a View Post
I don't see how capping your gains is an advantage, which is what you will be doing if you sell put instead of long synthetic/call.

I don't think you should sell puts to replace long call/stock when your view is very bullish.

But if you must sell puts to have theta on your side, I would sell ITM puts instead of OTM puts as its closer to a long call/stock position.

There is a pricing advantage to the sellers of options as well as the fact that you collect theta decay and/or volatility contraction.

I cap my gains because I know that the so-called unlimited upside is not really unlimited. Prices are not going to go to infinity and beyond. So your gains will be limited by the amount the price moves and where you plan to exit. What are you going to do...hold out for a 3 standard deviation move to the upside that only happens 1 or 2% of the time? If you plan on exiting the trade at 50% profit (much more likely) then it only makes sense to sell OTM and take advantage of Theta decay and volatility contraction in high implied volatility environments. I only sell OTM because there is no advantage for me to sell intrinsic value. I make no bones about the fact that I have no idea if the price will move up or down no matter what some chart or analyst is saying. But I do know that expected moves in high implied volatility tend too be overstated and that it tends to revert to the mean and that time moves forward.

If I were to buy or sell ITM like at 60 deltas or more....then 10 or more deltas of that are going to be intrinsic value and just trade 1 for 1 with the stock.

Selling OTM premium allows me to be directionally wrong and still make a profit. Selling ITM premium reduces that edge considerably.

Tastytrade.com has done tons of research on these subjects and I take advantage of it. I have seen no research that shows there is any advantage to unlimited upside.

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