I'm new to the world of Options and have a question that's been lingering in my mind...I've got a SEP/IRA account with my broker that's comfortably diverse in that I'm not concentrated on one stock. Unfortunately, all I can do as far as options are concerned is sell covered calls. I also have a margin account with the same broker that I'm using to get my feet wet with options.Ok, now the question: If I decide to invest in only one stock in my SEP/IRA account and buy a bunch of at-the-money puts in my margin account to cover the same number of shares, I have a synthetic straddle.Just to be more specific, I've done this with TTEC. Their earnings report is coming out on 2/19, traded at 25.98 and I bought the April 25 puts for 1.40. This was all done a few days ago, so the prices are different now.If TTEC comes out with earnings that pleases the public, the stock may have a nice rise and the puts expire worthless. The purchase of the puts are offset provided the stock rises above 27.38 or (1.4 + 25.98).If they disappoint, the stock may drop and my puts recoups that which the stock loses, provided the stock goes below 22.62 or 25-(25.98-25 +1.4). To boot, I get the funds "transferred" to my margin account without the 10% premature withdrawal penalty fee.If TTEC comes out with lukewarm earnings, the stock doesn't move and the puts expire worthless. Nothing happens and, most importantly, I get to sleep at night stress free.Does that sound about right?
Does that sound about right?Yes, except that the puts need not expire worthless. The at the money option premium decays as the square root of the time to expiration. So if you are just trying to hedge your total holdings, buy a put that is at least 2x the time to the earnings report. Then you are wagering only with 25% of the premium. You will lose some for the price going up, of course, if the news is good, but will be able to recover a substantial portion of the premium by selling the put on the news. Unfortunately, all I can do as far as options are concerned is sell covered calls.That's odd. The normal rules in IRAs should allow you to buy either puts or calls. Buy-writes are a well known conservative investment strategy that IRA rules also allow. The usual problem is that a broker won't let you sell a cash-secured put even though it is the same (barring some fees) as a doing a buy-write. There are, however, several brokerages that will allow you to do this in an IRA account (possibly after satisfying some experience requirement).
Yes, except that the puts need not expire worthless. The at the money option premium decays as the square root of the time to expiration. So if you are just trying to hedge your total holdings, buy a put that is at least 2x the time to the earnings report.Ok, that makes a lot of sense. When I first read that, I thought I made a mistake on the erp date, but as it turns out, the April puts I bought should be far out enough that I can still sell it after the report comes out. Whew!That's odd. The normal rules in IRAs should allow you to buy either puts or calls.I thought I read that somewhere. But when I asked my broker when I opened the IRA, the options agreement I signed was only for selling covered calls. I think I need to do more research on alternative brokers.Thank you very much for the response.
<<If I decide to invest in only one stock ... and buy a bunch of at-the-money puts in my margin account to cover the same number of shares, I have a synthetic straddle.>>At-the-money (ATM) puts have a delta of 0.50. Consequently, you need to buy twice as many puts as you are long shares to create a synthetic straddle (i.e., a delta neutral position). If you own 1000 shares of a stock, you will need to buy 20 ATM puts (representing 2000 shares).Jim
"I think I need to do more research on alternative brokers."----------------------------------------Maybe you want to check out IB (that's who I use) -https://www.interactivebrokers.com/en/main.phphttp://www.interactivebrokers.com/en/accounts/tradingPermissions.phpIB Trading Permissions:IN CASH ACCOUNT:Full payment must be made for all call and put purchases. Covered call writing is allowed, but the underlying stock must be available and is then restricted. Naked put writing is also allowed, but the funds must be available and then are restricted. You must have stock cash permissions in order to have options cash trading permissions. Cash from the sale of options becomes available 1 business day after the trade date.
The trading restrictions for a cash-only account (i.e., non-margin) are not the same as the trading restrictions for an IRA account.I'm not endorsing thinkorswim, but I know that their IRA trading restrictions are as lenient as possible and they restrict two types of trades:1. Stock short selling; and2. Naked short call options.http://www.thinkorswim.com/tos/displayFaq.tos (see questions 44 and 45).Jim
The trading restrictions for a cash-only account (i.e., non-margin) are not necessarily the same as the trading restrictions for an IRA account.I'm not endorsing thinkorswim, but I know that their IRA trading restrictions are as lenient as possible and they restrict two types of trades:1. Stock short selling; and2. Naked short call options.http://www.thinkorswim.com/tos/displayFaq.tos (change dialogue box to a search for "GENERAL QUESTIONS," press "Go" and then see questions 44 and 45).Jim
Here is a more complete description of the trades allowed in an IRA account at Interactive Brokers:What can I Invest in?Stocks, covered call writing (covered shares are restricted), buying calls (funds equal to the aggregate exercise value of the long calls are restricted), and buying puts (shares subject to exercise are restricted), selling cash secured puts, spreads securities with European style expiration, futures contracts, and futures options. IRAs may also invest in US dollar denominated futures contracts, and future option contracts.http://www.interactivebrokers.com/en/general/education/faqs/ira.php?ib_entity=llc#36
Thanks for the broker info, I may change brokers. I want to give my current broker the benefit of the doubt first though, just in case they wanted to see some kind of experience requirement as JuanBobsDad said.And thanks for the delta information, TMFHamp. This is all so new and so promising!
At-the-money (ATM) puts have a delta of 0.50. Realy? Is this always true? Without regard to time from expiration? Is this also true of calls?Jack
<<Is this always true? Without regard to time from expiration? Is this also true of calls?>>No, it is a rule of thumb that works best for near-term options. The more time until expiration, the more "positive delta" ATM calls have and the less "negative delta" ATM puts have. Why? Interest rates. If interest rates were zero, then ATM calls and ATM puts would always both have a delta of +- 0.50, regardless of time to expiration. But interest rates aren't zero and they affect long-term options more than short-term options. The higher the interest rate, the more valuable calls are and the less valuable puts are. Take, for example, Procter & Gamble (PG). It is currently trading at $65.00, so 65 calls and 65 puts are right at the money. The delta of the near-term January 2007 65 calls and puts are 0.51 and -0.49, respectively. Very close to +- 0.50. But take a look at the long-term January 2009 65 calls and puts, which have deltas of 0.63 and -0.40 respectively. For those of you with an options calculator, change the assumed interest rate to zero and the deltas of the January 2009 65 calls and puts both equal +- 0.50.Jim
The third book in my pile of to-read books is Natenberg's Option Volatility & Pricing so I can understand the Greeks. In the meantime I found this:http://www.ivolatility.com/calc/?ticker=pg&R=0&top_lookup__is__sent=1...which has all the Greeks and the capability to tinker with all sorts of variables. Obviously, I'm not too savy with how to take full advantage of this, but thought it might be of interest here.
And don't forget about dividends, which change the equation slightly (it's better to hold a dividend paying stock than to be synthetically long).
<<it's better to hold a dividend paying stock than to be synthetically long>>Call option prices are reduced to account for lost dividends, so I disagree with your statement.Jim
I agree with you opinion re owning dividend paying stock vs being syntheticaly long. What about selling puts on dividend paying stocks. Am I right in thinking that that the seller of a put is somewhat benifited in that the anticipated dividend is priced in and represents some % of the $ received from the sale.Jack
<<Am I right in thinking that the seller of a put is somewhat benefited in that the anticipated dividend is priced in and represents some % of the $ received from the sale?>>You are correct. Click on the options calculator link below, increase the dividend amount, and you will see that the price of the put increases:http://www.ivolatility.com/calc/?ticker=ibm Jim
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