Sheridan Options Mentoring Blog

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Options Safari: GOOG Earnings Iron Condor & APPL Bearish Butterfly Posted: 04 Apr 2012 08:40 AM PDT Dan’s two shows for CBOE TV Options Safari this week are: MCD Bullish Diagonal Spread FXE FXE Bearish Diagonal Tom suggested  Download the Presentation Slides here MCD Bullish Diagonal Spread FXE Bearish Diagonal Join our free public forums at http://forums.sheridanmentoring.com.

Option Synthetics Quiz Answers Posted: 03 Apr 2012 09:54 AM PDT Quiz Answer How did you do taking the quiz on Option Synthetics? In case you want a refresher, here’s an article I wrote about them that is a good summary: What everybody ought to know about Option Synthetics. We can use an easy equation to remember the synthetic relationships: C = U + P The relationships can be summarized in this short table: 1. Long Call = Long Stock + Long Put (C = U + P) 2. Short Call = Short Stock + Short Put (-C = -U – P) 3. Long Put = Long Call + Short Stock (P = C – U) 4. Short Put = Short Call + Long Stock (-P = -C + U) 5. Long Stock = Long Call + Short Put (U = C – P) 6. Short Stock = Short Call + Long Put (-U = -C + P) Armed with this information, let’s go through the quiz: 1. How would you create a synthetic SHORT CALL? That’s #2 on our summary: Short Stock + Short Put 2. How would you create synthetic LONG STOCK? That’s #5 on our summary: Long Call + Short Put 3. How would you create a synthetic LONG PUT? That’s #3 on our summary: Long Call + Short Stock 4. How would you hedge an out-of-the-money SHORT CALL with a synthetic position? To completely hedge the position, use a synthetic LONG CALL at the same strike as your SHORT CALL. Buy LONG STOCK and a LONG PUT at the same strike as your SHORT CALL. You now have zero risk and are perfectly hedged. 5. If your underlying is near your upside expiration on a butterfly trade, how would you reduce your delta risk with a synthetic position? If you are near the upside expiration of a butterfly, you have negative Deltas. New need to crease your deltas. Positive delta synthetics are #1, #4 and #5 on our summary list above. Any of them should give you more positive delta. If you need a fine adjustment, use #1 or #4 as #5 (Long Stock) is +100 deltas, which might be too much, depending on your butterfly size. 6. How can you completely neutralize a 100/110 call credit spread with puts? Create a box spread. The 100/110 call credit spread is +1 100C and -1 110C. If you add -1 100P and +1 110P you would have synthetic Long stock at 100 and synthetic Short stock at 110. This position has zero risk. 7. You are long a futures contract at $100. The contract is now at $125. How can you lock in the $25 profit without selling the futures contract over the weekend with a synthetic option position? To lock in the $25 profit, you just need to add a synthetic short future with futures options: -1 125C and +1 125P should give you a synthetic short future contract, which will neutralize your long future. I hope you enjoyed the quiz. It’s good to know these relationships and practice from time-to-time with a quiz like this!

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