Clappy,
If you sold 13 puts you could have bought 8 calls for the same money and had an additional 100 shares.
Yeah, but if it goes against you, were you planning on buying those 1300 shares above current market value? This is dangerous.
The selling of the puts helps to finance the calls. It is somewhat like a lower-interest loan, in that it reduces the outlay of cash needed to participate in the upside (and downside) of the common. But really, you aren't borrowing anything, you are taking on a risk like an insurance underwriter (that the stock won't tank below strike by expiry) and being paid an insurance premium for taking on the risk. You are free to use the cash premium for any purpose, so long as you maintain required margin capacity to be put (check your broker's rules). Buying the appropriate calls then ties your position's performance to the performance of the underlying stock, on both upside and downside.
Selling more than one put to one call places you at risk for a lot more downside than upside, so it is not a synthetic long. Instead you are speculating, looking to get all the gain from the stock without paying for it at all. ;) I do not do this and would not recommend it, the risk is too high for me. Think what happened to those folks who did too many short puts on a stock like MSTR or even AMZN, etc.. They got to buy a whole boatload of (then) overpriced stock, perhaps creating instant margin calls if they went beyond capacity when placing the short put positions.
Let me update you with my current position pricing, this may help to illuminate:
quote on SUNW now 108 1/2 x 108 3/4 + 3 3/4 (no position)
03 105 calls now 42 5/8 x 43 5/8 +2 1/8 (ask)
03 105 puts now 24 3/8 x 25 3/8 -1 5/8 (bid)
total gain in common would be 3 3/4
total gain in synth long is 3 3/4 (net position)
however, if I were to liquidate position now, I pay the spread, buying back the put at ask and selling call at bid, so the gain would be less:
liquidation of position:
put bought at ask 25 3/8 gain is 5/8
call sold at bid 42 5/8 gain is 2 1/8
total gain is 2 3/4 due to bid ask spreads.
to sum up, long common and synth long have the same risk reward characteristics. however you did pay an additional debit (in my case 14) for the synth long, so if it goes against you long term, you are out the debit as well. Being short extra puts just to cover the cost of the long calls doesn't make sense for me, as the risk is too large.
hm |
