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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: ild who wrote (171394)6/9/2002 5:10:22 PM
From: Tommaso  Read Replies (1) of 436258
 
Well, maybe if I meditate on it long enough I can understand how it works. The commissions and spreads on the regular puts and calls that I buy make me reluctant to do much trading of them. I just buy LEAPS and in most cases I get a move in my favor, sooner or later, that lets me out with a good profit. Almost every time I have bought anything with a shorter time horizon I have lost money.

If what you do works, more power to you.

But if I sold a put at, say a strike of 20 on a stock, and the stock moved to 15, I would be obliged to buy the stock from the put holder for 20 or else buy back the put, losing money. And if I held a call on the same stock, and the price dropped, I would lose the value of the call. I don't see how this creates a "synthetic stock," but maybe it will come to me after a while. I guess it does create a synthetic stock if the underlying stock goes up. It seems to me it creates synthetic antimoney if it goes down. I guess it also depends on what you originally get for the put and what you pay for the call.

I hope it does not sound as if I am quarreling with you. I am just trying to hold all this in my mind at once.

The situation I really like is the LEAP puts on the Dow, which one can buy at a NEGATIVE time premium. That is, one pays LESS than the current value. This is because they are European style and cannot be exercised until January 2004. They are selling for more than 10% LESS than the in-the-money value.
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