Option Synthetics: 5 Killer Ways to Use Money Effectively Collaborated with @niki_poojary
We need a thorough understanding of options & futures with their payout graphs to become excellent traders. Most individuals lack understanding of synthetics & are simply too confused. Let's start with comprehending synthetics & how they can aid in trading simply!
Any two of the following three can be combined to create synthetics. 1. Calls 2. Puts 3. Stocks and futures You don't even have to deal with stocks or futures. You can only obtain the payout graph you desire by using options.
Fut buy + Put buy= Call buy Ft buy + Call sell = Put sell Ft sell + Call buy = Put Buy Ft sell + Put sell = Call sell Ft buy = Call Buy + Put Sell Fut sell = Put Buy + Call Sell Know this extremely well since it is essential knowledge.
Trading with synthetics has four benefits. We'll also examine three issues and four myths related to strategies. Let's start by examining the benefits:
1. Higher Leverage Due to smaller margins, synthetics increase your leverage. You must pay a high margin, for instance, if you wish to purchase a stock. Instead, you may sell an ATM put and purchase an ATM call. Conversely, while selling. Options significantly reduce margins.
2. Fees are significantly reduced Futures trading has a cost in the form of significant STT costs, brokerage fees, etc. From a charges perspective, synthetics make more sense because options charges are much smaller.
3. Trade-in far-month expiries, such as December Expiry Can you go long in futures if you want to buy the Dec series right now? No. However, you may now sell puts and buy options in the Dec series.
4. Mtm loss isn't settled through cash In India, we are unable to short stocks; instead, we must trade futures. Since futures trades need collateral and mtm losses must be compensated daily, some traders prefer not to engage in futures trading.
Synthetics handles everything as you just have to pay the losses when you book your trade in loss or profit.
Problems: 1. Liquidity Issue - In stocks, there are liquidity issues when you try to use synthetics in ITM options. 2. Indian markets have low liquidity in contracts beyond the current month.
Eg: Reliance CMP is 2400 Covered call = Fut buy + 2600 call sell Put sell via synthetics = 2600 Put Sell Low liquidity here in the Put sold.
3. Mtm Loss needs to be paid in cash daily: Options mtm losses can be adjusted against collateral till you don't "book" the loss. Futures irrespective of if you book or don't book the loss, you still need to pay by cash daily.
Myths 1. Tripple Straddle has a huge advantage. 2. Inverted strangle has an advantage over strangles. There is no advantage to both. It's just more difficult to execute and there is higher slippage.
3. Futures "hedged" with puts If you buy a call profit is unlimited, but if no movement occurs then the option will deteriorate in value. If you buy fut and buy put, and if the stock doesn't move, the put goes to zero and fut doesn't give profit. Both are the same.
Some people avoid option buying due to: 1. Low probability of success 2. Constant theta decay. These same traders when they trade futures are buying puts as "hedges" too which is the same as buying options. This is totally illogical.
4. Covered Calls Can achieve the same via only selling puts. When we buy fut and sell call to "hedge" we pay two margin requirements. Selling a put requires only one margin. Vice-versa for covered puts.
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We hope we helped you clear some misconceptions/doubts regarding synthetics. If you found this useful, please do RT first tweet. Follow to never miss them. See past threads here: @AdityaTodmal & @niki_poojary
