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Syntheticcoveredcall

Trade Idea: GLD March 18th 140/September 17th 165 LCD*... long call diagonal. Comments: Here, I'm preliminarily pricing out a bullish assumption GLD setup, buying the back month 90 delta and selling the front month at-the-money call. I'd prefer to deploy this at that obvious support level at 160, which has resulted in some buying interest previously. If that occurs, I'd have to tweak the strikes slightly, selling an at-the-money 160, for example, and then buying whatever the 90 delta strike in the back month. The Metrics: Buying Power Effect: 22.79 ($2279) Max Profit: The Width of the Diagonal Spread (25.00) Minus the Debit Paid (22.79) = 2.21 ($221) ROC %-Age as a Function of Buying Power Effect: 2.21/22.79 = 9.7% Break Even: The Long Call Strike (140) + the Debit Paid (22.79) = 162.79 versus a spot price of 164.64 Trade Management: Take profit on the setup's approach of max (which would be 25.00). Otherwise, roll out the short call to a strike at or above your break even of 164.64 to reduce setup cost basis. Variations: Preliminarily, I'm pricing out the setup with a fairly long-dated back month. To get in with less buying power effect, look to buy a shorter duration back month 90 delta, with the trade-off being that you'll have less time to reduce cost basis via the short call in the event that gold prices keep on going down. To look for more profit potential, sell a less monied call (e.g., the 30 delta) to give the trade more room to the upside.
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AMEX:GLDLong
by NaughtyPines
19
Opening (IRA): JETS March 18th '22 16/September 17th 24 LCD** -- long call diagonal ... for a 6.85/contract debit. Comments: I wasn't entirely satisfied with what I would be getting paid for my go-to strategy of selling short puts in this, so doing something a little more directional here. Buying the back month 89 delta, selling the front month 37 here and paying 6.85 for an 8-wide with a max profit metric of 1.15 ($115)/contract or 16.8% ROC at max (assuming convergence of price on >$24/share). Will work it like a covered call.
AMEX:JETSLong
by NaughtyPines
Options Idea: Sell The Sep. 2020 PSTH/U Synthetic Covered CallIf you trust Bill Ackman, his new SPAC Pershing Square Tontine Holdings looks like a great candidate for a very short-term covered call position. Ackman has been on fire lately. Last year his flagship fund Pershing Square Holdings was up 58% and this year to date he’s up 46% after he turned a $27 million hedging position into $2.6 billion as markets tanked in March. What’s a SPAC? A SPAC (Special Purpose Acquisition Company) is a blank check company used to take a private company public. Instead of raising capital in a public offering, a private company can merge with a SPAC and get a guaranteed injection of cash at a predetermined price. Transaction costs and uncertainty are much lower. Management at a company looking to go public should prefer to go public via a SPAC as long as Ackman gives them the same valuation they would get from a traditional IPO. You can do this trade by simply buying 100 shares and then selling a call against it, but we did this trade synthetically using 3 options: Bought the March 18, 2021 $20 Call @ 3.90 Sold the March 18, 2021 $20 Put @ 1.75 Sold the September 18, 2020 $25 Call @ 0.35 Synthetic Covered Call A synthetic covered call is constructed by buying an at the money call and selling an at the money put and then selling another out of the money call. You get the same profit and loss graph as a normal covered call, but with no dividends (not a problem here) and with reduced capital outlay. PSTH.U closed at $21.83 on the day of our trade, so instead of using $2183 in cash for 100 shares, we used $862 in margin and took a position twice as large as our normal position size by going synthetic for the same capital outlay. We sold a short-dated out of the money call to help reduce our initial cost basis to the current trading price of PSTH/U, since the March 2021 options don’t have much liquidity. We may sell a few more covered calls against this position to bring our cost basis down to $20, which was the price of the SPAC's IPO and the redemption value of the SPAC's cash in trust. Redemption Value : PSTH.U shareholders have the option to redeem their shares for the $20 IPO price after the merger is announced. Let’s assume the market doesn’t look favorably on Ackman’s deal, PSTH.U shareholders can redeem their shares for $20 and exit before the merger is completed. Read the full prospectus for details (including scenarios where you might get less than $20, its complex). However, for us, this puts an effective floor on PSTH.U’s value at $20. If we want to stay conservative (and we are), we’ll sell calls to get our cost basis closer to $20. However, if you are bullish on Ackman like we are, we do not recommend selling calls against this position for an extended period. If a merger announcement is positively received by the market, the price will gap up instantly as investors realize they can immediately participate in the newly merged company’s equity via a position in PSTH.U. Those of us invested in PSTH.U have looked on in envy as KCAC (another SPAC) just struck a deal to take Quantumscape (an EV battery-maker) public. Shares in KCAC closed up 87% the day after merger news. This is why you don’t want to be stuck with a short call in PSTH.U when the merger news comes out. If the news is extremely positive, you might give up a huge windfall. Since SPACs have a limited lifespan, 2 years usually, as time continues it becomes increasingly dangerous to have a short call open on PSTH.U if your ultimate goal is to have a long position in Ackman’s merger pick. Our objectives for short call income generation against this position are as follows: Initial Objective: $0.32 (Recover Liquidity Loss) Secondary Objective: $1.83 (Reduce cost basis to the Redemption Value) We completed our initial objective by selling the Sep 18, 2020 call at $0.35 and we entered this trade $0.03 below the cost of going long. Again, our goal here is simply to increase our buying power on a trade we consder low-risk due to the redemption option. We may continue to sell calls for a limited time until we get our basis to $20. We don’t want to have a long call open at the time the merger is announced. 20-PSTHU-01 Opening Date: Sep 4, 2020 Expiration Date: March 19, 2021 DTE: 196 IV: 33.29% IV Percentile: N/A (less than 1 year trading) Odds of Winning: 54.55% Odds of Losing: 45.45% Win: > 21.80 @ Expiration Loss: < 21.80 @ Expiration Reg-T Margin: $862 Chart Legend Green Area: 100% Win Zone. If we finish above or in the green area, we’ve made a profit on our synthetic covered call. Since our position has a long call that means our potential gain is unlimited after Sep 18, 2020. Up to Sep 18, we are limited in our gain by our short $25 call. Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. Since we’ve sold a naked put we have losses all the way to $0. 1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included.
PLong
by OptionsCoach
EDUCATION: BACK MONTH DURATION SELECTION FOR SYNTHETICSI have on occasion highlighted the benefits of using various options strategies instead of getting into stock, not the least amongst them being buying power effect. Pictured here is a 98.35 delta long call in SPY in the December 16th '22 (896 Days Until Expiration) cycle costing 183.35 ($18,335) to put on versus 312.23 spot (i.e., it would cost $31,233 to get into a full, uncovered one lot of SPY here). Although even this highly delta'd long call is "dynamic" (i.e., its delta will change in response to movement in the underlying, decreasing as price moves into the strike and increasing as it moves away), it is -- at least at the outset -- near being equivalent to being in long SPY stock at the strike price (130) plus its value (183.35) or 313.35.* Such deeply monied longs generally stand in for stock, which are then covered with a short call to emulate a covered call without paying covered call prices. This is particularly important in a cash secured setting where buying power is limited or in small accounts where getting into a full one lot of certain underlyings is prohibitive. Naturally, even getting into this particular long call will be beyond the reach of some smaller accounts, but I'm using SPY here as an exemplar; the same delta and duration considerations apply with any underlying. Generally speaking, my rule as to duration with the back month long has been to "go as long-dated as you can afford to go," since having a longer back month duration allows for a maximal number of opportunities to reduce cost basis via short call. However, if your go-to strike to buy as your stock substitute is, for example, something around the 100 delta strike,** then going longer-dated usually means that you'll have to go deeper and deeper in the money to buy that strike, and that usually gets more and more expensive as you go out in time. But does it? Here's a look at SPY long calls around the 100 delta and their cost over time: October 16th 155 (105 days) 158.15 January 15th 130 (196 days) 183.20 March 19th 130 (258 days) 183.50 June 18th 130 (350 days) 183.35 September 17th 130 (441 days) 183.35 December 17th 130 (532 days) 183.30 March 18th '22 130 (623 days) 183.30 June 17th '22 130 (714 days) 183.30 December 16th '22 130 (896 days) 183.35 Interesting, huh? You basically don't pay more by going longer-dated between January of '21 and December of '22. Naturally, this might not always be the case; currently, expiry implied volatility slopes away somewhat from shorter duration implied in SPY, with all of '22 being between 22.6 and 22.9%, and we've had substantial periods of time where it is the exact opposite: implied slopes upward from short to longer duration. Put another way, you'll probably have to look at whether going longer duration makes sense each time you get ready to set one of these up. Just for kicks, I also looked at QQQ: October 16th 130: 122.95 January 15th 112: 141.00 March 19th 105: 148.05 June 18th 92 (lowest strike available): 160.05 September 17th 92 (lowest strike available): 161.00 June 17th '22 92 (lowest strike available): 161.00 December 16th '22 92 (lowest strike available): 161.50 Not much difference between going June of '21 versus December of '22. And EFA (albeit with fewer available expiries to look at): December 18th 25 (lowest strike): 37.02 March 19th 25 (lowest strike): 37.02 June 18th 25 (lowest strike): 37.00 January '22 25 (lowest strike): 36.88 No significant difference between December of '21 and January of '22. And TLT: October 16th 95: 68.55 December 18th 95: 68.55 January 15th 95: 68.55 January 21st '22 95: 68.55 December 16th '22 95: 68.60 No significant difference between October of this year and December of '22. In a nutshell: where there isn't a significant difference in price between shorter and longer duration of the same delta, go with the longer duration. It'll afford you with more time to reduce cost basis and/or generate cash flow via short call premium. * -- That particular strike is bid 181.90/mid 188.35/ask 184.75, but would to get filled somewhere closer to spot (312.33) minus the strike price (130) or 182.33. In all likelihood, you're going to pay some small amount of extrinsic, but would start price discovery there, since a strike near the 100 delta should be almost all intrinsic value. ** -- My general go-to in the past has been to buy the back month 90, sell the front month 30 to obtain a net delta metric of +60. Buying a slightly lower delta'd long will obviously cost less (e.g., the 90-delta December 16th '22 is at the 205 strike and would cost 114.25 to put on versus the near 100 delta 130's cost of 183.35), but will also have more extrinsic in it.
AMEX:SPYEducation
by NaughtyPines
TRADING IDEA: TWO BULLISH ASSUMPTION PLAYS IN DISHDISH announces earnings on Tuesday before market open and is a state of high volatility (>50%). While you can naturally go with the plain Jane volatility contraction play around earnings (short strangle), there might be an opportunity here to catch it at significant lows while simultaneously taking advantage of risk premium present here which will lower your cost basis out of the gate. The "Wheel of Fortune" Short Put Sell the June 15th 32.5 Put (Neutral to Bullish Assumption) Metrics: Probability of Profit: 64% Max Profit: 1.60/contract Buying Power Effect: 30.90 (cash secured); 6.18 (on margin) Break Even: 30.90 Notes: Look to either take profit at 50% max or run the contract all the way to expiry. If assigned, immediately proceed to cover at or above your cost basis (i.e., sell calls with strikes above 30.90). Proceed to work it as you would any other covered call. To bring in buying power effect somewhat, you can buy the throwaway 25 long for .15, which reduces the buying power effect to 6.05 in a cash secured environment (and reduces the credit received to 1.45 and changes your break even to 31.05); there isn't much advantage to doing that if on margin. The natural alternative is to roll the broken short put out "as is" for duration and additional credit before taking assignment. Assuming you can get a decent credit to do that, this is usually to your advantage somewhat, since taking on stock is more buying power intensive than naked short putting on margin or uber wide long put vertical in a cash secured environment. In the latter case, you'll have to re-up on buying a throwaway long before rolling out the short to keep the buying power effect in check. Synthetic Covered Call (Neutral to Bullish Assumption, But More Bullish than the Wheel of Fortune) Sell the June 15th 35 put Probability of Profit: 56% Max Profit: 2.95/contract Max Loss/Buying Power Effect: 32.05 (cash secured); 6.41 (on margin). Break Even: 32.05 Notes: Look to take profit at 50% max or do the same thing as you would with the Wheel of Fortune trade, albeit with a less favorable break even. Consequently, it's a slightly more bullish play since you need price to stay above your break even (32.05). Buying the 25 strike throwaway long brings in the buying power effect to 7.07 in a cash secured environment. * * * I also looked at doing a Poor Man's Covered Call, but it doesn't look like that would be a more capital efficient setup (at least when I priced it out during off hours) than naked short putting on margin or going uber wide short put vert to bring in buying power effect in cash secured. Preliminarily, a 90/30 June/Sept Poor Man's, which would involve buying the Sept 20 long and selling the June 15th 37.5 short, would cost 13.40 to put on.
DLong
by NaughtyPines
2
OPENING: GE MARCH 16TH 16 SHORT PUT... for a 1.66/contract credit. Metrics: Probability of Profit: 49% Max Profit: 1.66 ($166/contract) Max Loss: 14.34 (which equals the cost basis in any stock I'm assigned) Break Even: 14.34 Notes: Put on at the 70 delta strike, this is a synthetic covered call with a buying power effect that is far smaller (~20% of the max loss or $246/contract) as compared to a straight up covered call where you'd buy 100 shares at 14.58 for $1458 and then sell, for example, the March 23rd 30 delta short call at 15.5 for a piddly .35, resulting in a cost of 14.23 ($1423) to put on, so one of the pluses to this strategy is lower buying power effect. Granted, having the shares themselves entitles you to the divvies (the yield is currently 3.32%), and you won't get those with a naked short. However, some frown on covered calls as being "capped out" in terms of profit. While that can be partly addressed through rolling the short calls for strike improvement/cost basis reduction, the synthetic is more flexible, since the short put can be rolled up as price moves toward it and over it if that's what you want to do with the play (which is basically continually reduce cost basis in potential assigned shares "up front", after which you'd then proceed to cover via short call). Here, however, I'm looking to take profit at 50% max or .83 ($83)/contract, so I don't necessarily need price to break the short put completely ... .
NYSE:GELong
by NaughtyPines