Hi, thanks for this great post. Could you elaborate as to why to hedge you would buy the underlying + put rather than just buy ATM calls (same exposure but less friction/trading costs)?
Hi Ntervov. That is an excellent question. The difference is miniscule but still there. In case the trade is a winner, we get a bit more extrinsic value left over in the now OTM put. Additionally, if we get IV jump for whatever reason the now OTM put will have slightly more extrinsic compared to the ITM call.
I tried posting the snapshots here, but Substack wouldn't let me. If you have an IB account, you can try the "profile" section in the Options Chain, once you selected your desired options play and you can see how the PnL changes as the price of the underlying changes. With the synthetic call you have slightly better downside protection and slightly better upside than naked ATM calls. The difference is quite small though but on a large enough scale it starts adding up.
Hi, thanks for this great post. Could you elaborate as to why to hedge you would buy the underlying + put rather than just buy ATM calls (same exposure but less friction/trading costs)?
Hi, thanks for this great post. Could you elaborate as to why to hedge you would buy the underlying + put rather than just buy ATM calls (same exposure but less friction/trading costs)?
Hi Ntervov. That is an excellent question. The difference is miniscule but still there. In case the trade is a winner, we get a bit more extrinsic value left over in the now OTM put. Additionally, if we get IV jump for whatever reason the now OTM put will have slightly more extrinsic compared to the ITM call.
I tried posting the snapshots here, but Substack wouldn't let me. If you have an IB account, you can try the "profile" section in the Options Chain, once you selected your desired options play and you can see how the PnL changes as the price of the underlying changes. With the synthetic call you have slightly better downside protection and slightly better upside than naked ATM calls. The difference is quite small though but on a large enough scale it starts adding up.
Hi, thanks for this great post. Could you elaborate as to why to hedge you would buy the underlying + put rather than just buy ATM calls (same exposure but less friction/trading costs)?