What are the different ways a tastyliver can be long 50 shares of SPY? The simplest thing would be to buy 50 shares of SPY. Others might buy an at-the-money (ATM) call, but we’re option premium sellers so we would sell an ATM naked put. The third choice would be to use a Synthetic Position. How exactly would we put on the synthetic and what are the pros and cons of this choice? A table listed the standard margin for each of the three strategies. The long stock position had the highest margin and the synthetic the lowest. Tom and Tony noted that both the 50 shares and the Synthetic are “Static” and will always be worth 50 shares but the ATM put can move around.
The pros and cons of using a synthetic position were listed. These are things traders should take into account when deciding whether or not to use this alternative. The margin rate is lower than outright stock. Theta decay (time decay) increases our probability of profit (POP). It can easily be done even on hard to borrow stocks. There are downsides. One downside is that a synthetically long position won’t receive a dividend. There is risk of early assignment too. Finally there is exposure to increased Gamma.
Synthetic positions are usually placed ATM and for the same strike but that would create a synthetic position of long 100 shares. When dealing with odd lots (less than 100 shares) we change the strikes. To create a 50 share long we would buy an out-of-the-money (OTM) 25 Delta call and sell an OTM 25 Delta put. A table laid out an example of the synthetic in question with the SPY trading at $206.50. The $211 strike of the long call and the $199 strike of the short put were listed along with the debit for the call and the credit for the put. The total was a 0.55 credit. The breakeven on the downside was also noted at $198.45. A long 50 share position from $206.50 at that same level would be a loss of just over $400.
For more information on Synthetics see:
Closing The Gap from February 6th, 2015: "Synthetic Stock!"
Best Practices from July 27th, 2015: “Synthetic Positions”
Market Measures from September 18th, 2015: “Short Synthetics | Pricing”
Closing the Gap from December 22nd, 2015: “Covered Strangle: Synthetic Underlying”
Closing The Gap from May 16th, 2016: "Covered Strangles: Synthetic Underlying & Strike Selection"
Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for the important takeaways and a better understanding of the pros and cons of Synthetics.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.