Jeff, I'm having a hard time wrapping my brain around this position. Selling a put is a bullish tactic as is buying the call. So if the stock goes up, haven't you already capped your winning on the put side to whatever you sold it for?

Are you going to go over this in your presentation tonight? (that's still on, isn't it?)

Also, if one was to trade synthetics, do you always go ATM and the same strike for the call and put? Would you recommend this strategy on some of the pricier stocks like ISRG?

(Pulling this forward from the last thread)

Jeff, a question about COF:

A few posts ago, you brought to our attention a bullish divergence in the financials, specifically banks. Although COF is in the consumer financials (not banks), I went ahead and pulled up my RSI_BS(14,2) on the COF chart.

Would you consider this to be a bullish divergence? If so, when playing the descending triangle (upon confirmation), would you keep your time horizon very short considering current market conditions and the noted bullish divergence?

Also, on this particular descending triangle, can you please tell me where you started your upper line? October 11th or October 31st perhaps? (If you remember, I'm the one who mentioned needing help drawing my lines) :)

Thanks so much.

Jeff,

You said you trade ATMs when youtrade these? How often do you trade these types of trades? If not all the time then what conditions warrants you trading them? Thank you for your education post!

Karl,

I trade them when I really want to neutralize IV, and still want unlimited gains. Maybe once or twice a month on average.

Doji Girl,

This would be like a stock position i-e you have unlimited loss and gain. when you buy a call, your mas loss is the premium. With the synthetic position also you will have a margin held in your account (typicaly arround 25% of the stock's price).

This is a great way to negate the option geeks.

Jeff,

Thank you. Is this done on positions you are already in and when the IV is high?

Thank you for taking the time to teach.

Mahmood,

If I understand Jeff's post this is not in conjunction with a Stock trade? It is to simulate a stock trade. Jeff - help please?

Jeff,

Wouldn't another disadvantage with synthetics be the higher margin requirements with holding the position? In your VIP example, the synthetic has a margin requirement of $4,085 even though it only costs $100 per position. Is there a way to neutralize the high margin requirements while maintaining a high delta position?

Karl,
I am not saying that you need to have any stock position. This is a standalone trade that behaves like a stock position and hence has unlimited gain and loss with delta at almost 1, and vega to 0. You do have margins held for this position.

you do not use this to convert current position of calls to synthetic etc.

Jeff,

Nevermind. The $4k is the potential loss per synthetic trade. The margin requirements are only about $1k. Sorry!

Mahmood -

Thanks - I see formyour original post that I missed your statement about it not being a stock trade. Sorry for the confusion. Jeff no need for help - I have been helped....

Doji,

If you are using TOS .... look for a COLLAR/Synthetic .. it does this trade automatically for you ... very simple on TOS...

Forgot if you are on TOS or not ....

If anyone really wants to learn synthetics or CONVERSIONS read - Options the hidden reality , risk doctor's book.. This is a MUST Read!!!!!

there is a free couple of chapters on the website - I think it is one of the best books on converting positions (bearish to bullish to neutral ect) that i have ever read, however it is extremely complicated!

however a warning (copied)

ON’T READ THIS BOOK IF:

1. You think options are easy
2. Fortunes can be made in options overnight
3. Option doesn’t require hard work and perseverance
4. You can buy this book and finish it over the weekend and it will than decorate the bookshelf

http://www.riskdoctor.com/books.htm

jeff
thanks for the watchlist...hey what class is DG talking about???

Jeff-

What happens if VIP drops below $40, wouldn't you then have to be worried about getting assigned the put you sold? What would happen then?

Sorry if this is a dumb question but thank you,

Lara

Jeff,

Love this strategy. Sounds like you are doubling your winnings for the same move in the stock, which is great.

Would you want to use it each time you would otherwise buy just a call? When wouldn't you want to use the synthetic stratgey? I gather your risk also goes up (lose money on the call & it's more expensive to buy back a now ITM put if the stock moves against you).

Jeff,

Excellent Open House tonight!!! I will have to try this paper trade and ask questions, but you have opened new possibilities for me.

Thanks,

Denver

Jeff, thank you for talking about synthetics in the open house tonight! I still have some questions abouta risk - If you do a synthetic long with 1 contract each put and call, are you now effectively controlling 2 contracts (200 shares) of stock? Or is it always going to be equal to +100 delta? So how do you determine position risk? Example- would a $3 drop in the stock price equal -$300 for your position?

Also, if the stock drops enough to warrant closing the trade, now you will lose on both sides because your call is worth less when you sell it but you have to pay more to buy back the put. Is this correct? What am I missing here?

Benton, yes I use TOS...will check out Collars. Never knew what a collar was before.

For those of you using TOS, if you add a colume in your trade tab or use the drop down in the upper right corner and add "Theo Pricing", you can easily see the impacts to your options as you change the price of the stock up or down. Makes if very visual and easy to see impacts on your options especially for this strategy. Also use the Collar/Synthetic (combo) choice.
John

I still do not get it. You can set the position only by paying a premium. You use less margin requirement, but still have the same risk. You have to suffer for the gap when trying to close back the position and you loose some liquidity. When the stock moves up your gain is the same as the one that have the stock, but you pay a premium and even having the same downside risk. If I'm that confident of a movement I prefer to pay for the Call and prepare the trigger.

Jeff,

Would CLB be a good candidate for a synthetic position? It has high IV, it's at a good bullish entry point (bounce on solid 2yr trendline), the only thing is the option spreads are less than ideal.

Wow, I could have been purchasing synthetics! Jeff another intriguing topic. I no longer have Master Talk so if your covering it now, I unfortunately am missing it. I will watch for more follow up on the site and paper trade a few to check results. If they are positive off I go to the real thing and really begin the learning. Doji, good questions...

I'm viewing .VIQAH (VIP Jan08@40) and see a Delta of
on call of .58 and put .42 are you combining the two to get the 1.01 Delta? (Morningstar.com)

Jim, yes that is what Jeff is doing. If you short an option you have the inverse of the delta. Puts have negative delta. So if you short a put, you have long delta. And if you long a call, you will have additional long delta for a combined total of 1.00.

Aussie.

I would be interested in your thoughts on the RiskDoctor book.

I have seen it recommended several times and read the 1st chapter and like his writing style. Is the book clear enough and helpful enough to be understood without the one-on-one training or walk-through DVDs?

hey, been on the site for a couple weeks now and i feel like im missing something. Is there some kind of live show that im missing on "master chat" or something???

Jeff,
Can a Flag also be an an Ascending Triangle? I am referring to ATW. And I know you weren't looking for feedback on your Watch List format, but I vote for whatever is easiest for you and for whatever format you feel like at the time. Anyway you slice it, your Watchlist is 'money' !!!

Thanks for the awesome list and great info on the Synthetic.

Carl...

I don't think so. But on the other hand...maybe. Do you have an example we can disect tomorrow?

If so, e-mail it to me.

JK

Great stuff, you get to control 100 shares of stock for $100. Significant downside risk, though. I'm assuming you can do this on the flip-side: buy a put and sell a call if you're bearish. My question is: Would you adjust this, if it went against you, or simply get out of the position (presumably before the put went in the money), AND would going deeper in the money (buying the 35 call and selling the 35 put) give you a bit of a cushion and help with the risk of an adverse price movement?

thanks!

Nike anyone (NKE) ahead of earnings wednesday how do you think this will move.

Hi Charlie,

MasterTalk is part of the InvestTools program and is great. It does of course cost but if you are serious about trading it can really boost your skills. See www.investools.com for more information.

Good luck,

Jim

Nice Post!

Jeff,

Thank you for offering to futher explain this to me/us:

My trade candidate is SYNA. It is on you watchlist and was on mine. It is sitting at a good diagonal support trendline and a horizontal support area. The Jan 55s seem to answer the mail according to what you are saying? Can you use SYNA to continue to teach this method? Thank you!

Vikes,

It is truely incredible - it is a book that really make you think about how to convert positions - i.e initally start with a bullish long call, (if stock does not do what is expected) conversion into diagonal credit spread (bear), then prehaps taking profits and conveting one side into something else.

It really teaches you to dissect positions (i.e if you are tradeing index options, and have several positions running- shows you what you really have.)

however it is very very complicated. good book to read, then go back too , then read!

i recommend it :)

Jeff, a question

buy the calls for 3.70, and sell the puts for 2.70.
but if VIP drops below $40 you have to sell the call
for +/- 2.70 and buy the put for +/- 3.70.
if VIP drops below $40 you have 2x loss.
sorry about this question, because i wil like learn trade option, i bougt only call or put, but not a combination, i read everyday you post, i like it
Thanks for all your efforts
Sorry,

test

guys: I think you are missing the point on his example.
This is a substitution for owning the stock.
It creates a higher delta, to simulate owning the stock. You would gain and lose the same as if you actually owned the stock ( shares). The advantage is that you still use leverage instead of owning the stock.

So you would treat this combination the same as if you actually owned the shares of the stock, nothing more or nothing less.

David$..your right. Its a substitution for buying stock. Remember to position size. If you are risk reward dictates that you buy 100 shares of stock then you do it with 1 contract on each side.

DAVID$ Thanks for your explain , i am hier to learn more about option.

With Synthetics you can get paid to enter a position!

I've been talking about constructing synthetics for the past several days in the Advanced Options chat room on Investools and all I hear is the soft chirping of crickets. I guess since it is not contained in the regular course curiculum they don't know what to make of it. If anyone is interested try this link:
http://forums.investools.com/thread.jspa?threadID=19882&tstart=0

I usually buy them ATM but if I am feeling strongly about a stocks movement I will go OTM such as FSLR, ISRG and BIDU. On an OTM trade your gain on premium is infinite since you actually received money to enter the position. This can be done for bearish trades as well. This is now how I trade the majority of my directional trades.
Stan

VIP on weakness (just got downgraded)... CSIQ

Stan -

I understand the concept of synthetics and creating the same delta as owning the stock, but since the position ties up the same amount of money on margin as a stock purchase would, I am struggling with the advantages. Please tell me what I am missing. THANKS!!!

Stan,

Thanks for the info. I have a few questions for you. I would like to consider this option (no pun intended), but it makes me nervous to have an ITM put option.

1. going OTM on the call means you're ITM on the put? Yes, you do receive a credit, technically, but have you ever been wrong and had to close out a position? Not doubting you, just want to know what the max risk is (as you defined it for yourself going into the position).

2. Have you ever used a collar? ie. buying an ATM call and selling an ITM put, for a bullish position and collecting the premium, or buying an ATM put and selling an ITM call, for a bearish position?

thanks!
Mike

Elissa- One advantage is that you are leveraged and the cost to hold a position is much less than that of owning the stock outright or on margin. Naked puts have a 20% margin requirement with TOS. Here is an example:
VIP you can buy 100 shares for $3800
You can buy 100 shares on margin for $1900
You can buy an ATM (40) call for $5.10 or $510
You can buy an ATM synthetic (40) for- wait you don't pay, you GET PAID $1.20 or $120

Mike- yes I have been wrong and had to close out positions for losses, just about every day as a matter of fact but the winners outweigh the losers since I have been doing this only on stocks I have strong directional indicators on such as the financial, real estate and building industry in the past.

My max risk is very small since I use the tried and tested REE method that I have learned here.

I have used collars in the past to protect my stock positions wherein I sell an OTM call and buy an OTM put. It limits my upside but protects the downside.
Stan

thanks for the insight - I did not know about the 20% naked put margin requirement as opposed to 50% on stocks. When I was experimenting with some trades to see what my margin requirement would be on TOS, it looked like they were margining me at 100%. Perhaps my balance is not high enough? I am going to call TOS and inquire.

Elissa

BTW Mike- Run the numbers with the TOS Theoretical Price calculator to see if it makes sense but you can always choose different strikes. Buying ITM calls and OTM puts but it really doesn't matter much since if it moves against you, it moves against you no matter where your strikes are. I have also recently dabbled with buying my call 3 to 6 months out and selling the front month ATM put, let it expire sell the next ATM front month put, let it expire, etc. You can churn an extra 40-50% premium out of the puts that way. As long as it goes your way that is.
Stan