Synthetics vs cash positions.

December 28th, 2014, 10:27 PM

Hope everyone had a great holiday.

I would appreciate any views on trading the synthetic vs taking a cash position, mainly for the purpose of maximizing available margin.

I am looking at a TOS recommendation to buy WUBA with a $47.80 target. Closed at $42.78. All numbers generated by TOS.

If buy the cash, am looking at 300 share position, and target is reached the profit is $1,506.

Then look at the synthetics with a strike range of $35-$50.

Strike Cost Breakeven Profit on expiration at $47.80

$35 $6.60 DR $41.60 $1,860
$40 $2.20 DR $42.20 $1,680
$45 $2.95 CR $42.05 $1,726
$50 $8.10 CR $41.90 $1,770

these options are not the most liquid, but my query is quite general.

The "obvious" trade seems to be the deep ITM $35 strike. However am aware that anything that seems obvious rarely is.

Do the active traders here have a "rule of thumb" when choosing the strike for a synthetic trade.

Many thanks.

December 28th, 2014, 10:36 PM

scenic58

Hope everyone had a great holiday.

I would appreciate any views on trading the synthetic vs taking a cash position, mainly for the purpose of maximizing available margin.

I am looking at a TOS recommendation to buy WUBA with a $47.80 target. Closed at $42.78. All numbers generated by TOS.

If buy the cash, am looking at 300 share position, and target is reached the profit is $1,506.

Then look at the synthetics with a strike range of $35-$50.

Strike Cost Breakeven Profit on expiration at $47.80

$35 $6.60 DR $41.60 $1,860
$40 $2.20 DR $42.20 $1,680
$45 $2.95 CR $42.05 $1,726
$50 $8.10 CR $41.90 $1,770

these options are not the most liquid, but my query is quite general.

The "obvious" trade seems to be the deep ITM $35 strike. However am aware that anything that seems obvious rarely is.

Do the active traders here have a "rule of thumb" when choosing the strike for a synthetic trade.

Many thanks.

Maximizing the buying power on margin is definitely a good thing, although it is naturally increasing your leverage. In general when I am looking at synthetic positions it is the one that is the most liquid that replicates the position i need as closely as possible. So look at what strike price you would enter if it was cash and try to get that through the synthetic. If liquidity is an issue then plan on being there until expiry or re think your strategy, and mix the cash with a partial synth position. This would let you at least reduce risk in a more liquid market, and have lower leverage..

Synthetics vs cash positions.

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Synthetics vs cash positions.