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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: RDM who wrote (77909)	10/30/1999 3:58:00 AM
From: Bilow	Read Replies (1) \| Respond to of 1577188

Hi RDM; Yep, sounds like you bought a synthetic long. The tax consequences might make it worthwhile, but I don't immediately see how. If that were the reason for the trade, I would think you would use a strike well away from the current price, rather than one close to it. That would be maybe the 15 strike, if they've got one. (This would maximize the tax loss on the call, but would otherwise be an identical trade, though it would require more equity.) If you write the put and buy the call at the same time, the overall action is equivalent to going long AMD at the strike price, with delivery to occur at the expiration date. The difference in premium is essentially an adjustment to the strike price. Since you collected 3/16, the overall effect of what you did is to buy AMD at a price of 19 13/16 for delivery on the expiration date. If you were a floor broker, and made the spreads, this would be a rational trade, unfortunately, I guess, you're not. What you did was buy AMD for a price somewhat above what it was trading for at the time. In addition, you also had to pay extra commissions. (Your broker loves you.) The explanation for all this isn't particularly simple. The best book I have on options is "Options as a Strategic Investment", which I recommend. Just buy it at barnesandnoble.com instead of Amazon, cause I'm short AMZN, please. There are three cases for what happens to AMD's stock price on expiration: (1) If the stock ends up at exactly $20, the options both expire worthless, and you keep the 3/16ths. This is equivalent to the profit you would have if you had bought the stock at 19 13/16, and then sold it for 20. (2) If the stock ends up below $20, then the put will cost you the difference. Say it ends up X dollars below $20. You will owe X on the put, but have the 3/16ths. Consequently, your total return will be 3/16 - X, exactly the same as if you had bought the stock at a price of 19 13/16, and sold it at 20 - X. (3) If the stock ends up above $20, then the put expires worthless, and the call makes you money. Say it ends up X dollars above $20. You will make X from the call, plus you have your 3/16. The total return will be X + 3/16, exactly the same as if you had bought AMD at a price of 19 13/16, and sold it for 20 + X. In other words, your profit is going to be the (signed) difference between the price of AMD on expiration and 19 13/16. That's why it's called a "synthetic long." Historical and pedagogical note: The above equations and argument are very fundamental to the analysis of options. There was a time when only calls were traded on a lot of stocks. If someone wanted a put, what they did was to buy a call and short the stock. This is called a "synthetic put". It might not be possible to find the term "synthetic long" in an options book, as a real long reduces transaction costs. Only a floor broker would be likely to get into a synthetic long, and he would, no doubt, cancel his position with a real short. Best of luck, -- Carl P.S. I am of the opinion that complicated options trades are not a good idea for the vast majority of all investors.