19 lines
1.2 KiB
Plaintext
19 lines
1.2 KiB
Plaintext
Synthetic Straddles
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Straddles are the pet strategy of certain professional traders who specialize
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in trading volatility. In fact, in the mind of many of these traders, a straddle
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is all there is. Any single-legged trade can be turned into a straddle
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synthetically simply by adding stock.
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Chapter 6 discussed put-call parity and showed that, for all intents and
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purposes, a put is a call and a call is a put. For the most part, the greeks of
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the options in the put-call pair are essentially the same. The delta is the only
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real difference. And, of course, that can be easily corrected. As a matter of
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perspective, one can make the case that buying two calls is essentially the
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same as buying a call and a put, once stock enters into the equation.
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Take a non-dividend-paying stock trading at $40 a share. With 60 days
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until expiration, a 25 volatility, and a 4 percent interest rate, the greeks of
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the 40-strike calls and puts of the straddle are as follows:
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Essentially, the same position can be created by buying one leg of the
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spread synthetically. For example, in addition to buying one 40 call, another
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40 call can be purchased along with shorting 100 shares of stock to create a
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40 put synthetically.
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