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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: Mark Davis who wrote (9345)	7/2/2000 11:52:23 AM
From: Dan Duchardt	Respond to of 18137

Mark, Could you explain the purpose of the Long Put in setting up the Forward Conversion. Since being short a deep in the money Call, and long the stock, effectively lets you get short by selling the stock, why the need for the 'extra' position? You are right that a short DITM (deep in the money) call is about the same as being short the stock, but DITM is relative. If the stock goes down, DITM turns into ITM (in the money), ATM (at the money), and possibly even OTM (out of the money). As the stock price falls, the rate of decline of the call price with stock price, measured by "delta" falls off. DITM calls have delta near 100%, but ATM calls have delta near 50%, and OTMs easily get delta down to the teens and single digits. The deltas of calls and puts are complementary, and stay that way as the stock price rises and falls. Being long a call and short a put of the same strike gives you a constant net delta of 100% and is often called "synthetic stock". Choosing the strike price near ATM can neutralize any time value gains or losses. Conversely, being long a put and short a call gives you a constant net delta of -100%, a "synthetic short" whose value moves dollar for dollar against the stock. The advantage of this over the short DITM call is you don't have to worry about rolling calls to new strike prices to maintain 100% delta, something you don't want to be fooling around with considering the spreads and slippage you often get with options. Dan

To: Mark Davis who wrote (9345)	7/2/2000 11:55:05 AM
From: OZ	Read Replies (1) \| Respond to of 18137

Once the bullet or conversion is setup, you do not have to worry about it for week/months. You can just continue to move in and out of a short position at will up until that point. The object is to avoid the bid test rules. We are not comparing trading options versus trading stocks. All these mechanics happen in the background. The trader only focuses on shorting and covering the stock and not the intricacies of options positions. OZ