AW: [RT] conservative?

[MikeSuesserott@xxxxxxxxxxx]

Ben,

your strategy is called a synthetic diagonal backspread, an absolutely
legitimate technique to use. Since you welcomed comments, here are a few
pointers.

For one thing, Ben, this position, though well protected, cannot be called a
no-loss situation. It is definitely sensitive to time decay, as well as to
any rise in volatility. Worst case on Feb. 15 would be a stock price of
around 52 after wild rides up and down during the previous few days,
resulting in high volatilities; this scenario would most probably bring on a
painful loss. Of course, you might sell more premium then at the next
expirations, hoping to recover the loss, but that would have to be regarded
as a new trade that would be incurring new risk again. And, of course, you
might be able to adjust or unwind the position at an earlier time with only
a small loss, but this would also rob you of the chances to profit further
from this position.

So I am not criticizing this strategy, it has its merits, only it is not a
no-loss position, just one with a limited loss / limited profit potential.

The other point I wanted to bring up - why use a synthetic position at all?
Suppose your position size was
	long 1000 shares at 52 1/2,
	short 10 May 55 calls at 13,
	long  10 Feb 50 puts at 9 1/2,
resulting in a capital outlay of nearly $ 50,000. This capital will not be
available for trading until you unwind your position. Why not use this
totally equivalent position:
	short 10 May 55 calls,
	long  10 Feb 50 calls,
which might be done at nearly even money (if you entered this position now,
you could even obtain a credit). The capital requirement would be determined
by the SPAN margin for the position, as of today some $ 23,000 minus the
credit of about $ 4,000 which means about $19,000 of your capital bound in
this trade, as compared to almost $ 50,000 for the synthetic variant.

Regards,

Michael Suesserott



-----Ursprungliche Nachricht-----
Von: proffittak@xxxxxxx [mailto:proffittak@xxxxxxx]
Gesendet: Friday, January 19, 2001 18:02
An: realtraders@xxxxxxxxxxx
Betreff: [RT] conservative?


hello


bought   itwo   @52 !/2
sold may 55@xx

bought  feb 50put@xxx

on  Feb 15 will buy may/50 put
buy back  the May 55 call
and sell the   July calls
comments welcome
annual income net   40%
if stck goes up you make money
if it stays the same you collect  calls income
if it goes down  you  get the put  profit plus collect the  call money
no loose situation


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