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training_data/curated/text/433d904138fb4a71d03313bed5a03ed3f57435ef7eba8053c2ffd5312fa61db5.txt

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+to offsetting each other. For all intents and purposes, the trader is out of the
+primary risks of the position as measured by greeks when a position is
+converted. Let’s look at a more detailed example.
+A trader executes the following trade (for the purposes of this example,
+we assume the stock pays no dividend and the trade is executed at fair
+value):
+Sell one 71-day 50 call at 3.50
+Buy one 71-day 50 put at 1.50
+Buy 100 shares at $51.54
+The trader buys the stock at $51.54 and synthetically sells the stock at
+$52. The synthetic price is computed as −3.50 + 1.50 − 50. Therefore, the
+stock is sold synthetically at $0.46 over the actual stock price.
+Exhibit 6.8 shows the analytics for the conversion.
+EXHIBIT 6.8 Conversion greeks.
+This position has very subtle sensitivity to the greeks. The net delta for
+the spread has a very slightly negative bias. The bias is so small it is
+negligible to most traders, except professionals trading very large positions.
+Why does this negative delta bias exist? Mathematically, the synthetic’s
+delta can be higher with American options than with their European
+counterparts because of the possibility of early exercise of the put. This
+anomaly becomes more tangible when we consider the unique directional
+risk associated with this trade.
+In this example, the stock is synthetically sold at $0.46 over the price at
+which the stock is bought. If the stock declines significantly in value before
+expiration, the put will, at some point, trade at parity while the call loses all
+its time value. In this scenario, the value of the synthetic stock will be short
+at effectively the same price as the actual stock price. For example, if the
+stock declines to $35 per share then the numbers are as follows: