Controversial Option Discussion Of The Day - Calls and Puts

[wayneL]

One of the first thing professional traders are taught is:

A call IS a put. A put IS a call.

Discuss.

 

[Timmy]

Wayne ... I'm looking forward to this, I think I might learn something.

I have been sitting here trying to understand this, or at least get some sort of handle on it.

The only thing I can come up with is if I buy a call on, say, WBC (random stock pick) I am, in effect, also buying a put on my cash ... the right to 'short' cash in exchange for shares in WBC.

Am I getting warm?

 

[matty2.0]

A call IS a put. A put IS a call.

Discuss.

A call is a put, only if the call goes kaput.

 

[beerwm]

One of the first thing professional traders are taught is:

A call IS a put. A put IS a call.

Discuss.

ok,

So i have a Call at $5, on a $10 stock. - [the right to buy @ 5],
same stock,
I have the [ the right to sell @ 10] - Put
>>>after/if i buy it for $5.

or..

maybe the lesson is dont overthink things - like a lesson in a lesson

 

[beerwm]

ok new theory-

I dont know options;

but... im guessing the value of a call/put is reflected on the volitily of a stock amongst other things.

so price of call = put - under same circumstances

 

[dutchie]

A call for one person is a put for the other side. etc.

 

[wayneL]

OK I've kept everybody in suspense long enough. Not through intentional mind games, just through normal Sunday recreational activities. Anybody in London interested in Bohemianism, get your @ss to Camden.

We all know the differences between a call and a put... one is right to buy/obligation to sell, the other a right to sell/obligation to buy.

What prompted this thread was the discussion of synthetics on the other thread, and this is what they are trying to get at with the statement in the opening post.

They are trying to get traders to understand that there is a direct mathematical relationship between a call, a put, and the underlying stock. They are trying to get people to understand synthetics.

This is reflected in the put/call parity equation, viz (adjusted for dividends and cost of carry):

The call option price - corresponding put option price = stock price - strike price.

Also, the absolute value of delta of the call + the corresponding put, must equal 100, which is the precise absolute value of any stock position.

Further evidence is in the fact that a put can be converted to a call and visa versa, buy simply adding or subtracting stock, thereby changing the delta. All other greeks are identical. A call is a put + stock. A put is a call - stock.

One might argue over the semantics of the statement, but the idea is to get people thinking the right way, to think in terms of synthetic equivalence.

That done, the trader can never again be fooled into believing some of the nonsense spouted by ersatz experts in various places.

That's it.

 

[wayneL]

Jesus! That killed off the thread.

 

[beerwm]

Jesus! That killed off the thread.

I think we're all waiting for lesson 2.

keep'em coming

 

[wayneL]

Pick the odd one out and why:

1. Delta
2. Gamma
3. Theta
4. Rho
5. Sigma
6. Vega

 

[Frogacle]

Rho because it ends with a different vowel.

Its either that or Sigma, which I've never seen used in the context of options.

 

[wayneL]

Rho because it ends with a different vowel.

Observant, but not what I was looking for.

Its either that or Sigma, which I've never seen used in the context of options.

Nope.

Sigma is the Greek letter that signifies volatility, viz, 1 standard deviation... and the name of my blog. (There is a clue in that statement)

 

[Cartman]

Pick the odd one out and why:

1. Delta
2. Gamma
3. Theta
4. Rho
5. Sigma
6. Vega

Uncle "Vega" was flown in from Panama .... he's not even Greek ! ..... im sure there is more to it than that though

 

[wayneL]

Uncle "Vega" was flown in from Panama .... he's not even Greek ! ..... im sure there is more to it than that though

Bingo. Your special prize is being mailed to you.

 

[mazzatelli1000]

Uncle Vega can change his name to Kappa
Then he can fit in with the rest

How about this timeless statement from a questionable character:
"Credit spreads are better than debit spreads because they...you guessed it bring in a credit to your account. Get paid first, ask questions later"

True or False and why

 

[Cartman]

Bingo. Your special prize is being mailed to you.

sweet !! --- can i have a red one?

on a point u made in another post Wayne ....

it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks

does that theory still hold water or is my boat leaking :bowser:? ---

ps bear in mind i am in "option kindy"

 

[cutz]

"Credit spreads are better than debit spreads because they...you guessed it bring in a credit to your account. Get paid first, ask questions later"

True or False and why

Hi mazza,

I'll have a crack at this seeing this is something that's been gnawing at me for a while.

Personally i reckon credit spreads are better as they seem to have a higher probability of success. I say this because i think it's impossible to predict where a particular underlying is going to end up in say 4 weeks time.

To use a wrangle done for credit as an example, what's the probability of the underlying ending up in a loss zone as opposed to a long butterfly ending up in the profit zone?.

 

[Ageo]

it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks

I might have a go at this, i think the reason being is (im assuming they understand options) is that not all people can afford 1000 shares in 1 hit (unlike the U.S 100 share per contract).

2nd its only in increments of 1000 so to top up you need to write another put which means another 1000 shares if exercised.

But i understand your theory as it only makes sense to collect premium along the way and if you do get exercised at least you have bought the stock at a discount (to what you perceived as good value). Obviously writing out of the money covered calls along the way isnt a bad strategy either in times like this as it helps offset any losses.

Wayne, for some reason i have never gotten to really understand the greeks (perhaps im too lazy) but do you find it essential for medium to long term investing? i know the more knowledge the better but how useful do you find it for your longer term share investing?

 

[Toothyfish]

Uncle Vega sure goes by many names, I've heard he's been called Omega as well.

 

[wayneL]

Uncle Vega can change his name to Kappa
Then he can fit in with the rest

I've even seen him referred to as omega and tau. Perhaps he likes being master of disguises. I've been tryng to find where vega comes from. The best I can find is that it's Arabic and means descending eagle or something.

How about this timeless statement from a questionable character:
"Credit spreads are better than debit spreads because they...you guessed it bring in a credit to your account. Get paid first, ask questions later"

True or False and why

Yes good one Mazza. As a clarification, we're talking about identical strikes in the credit and debit spread, yes?

sweet !! --- can i have a red one?

on a point u made in another post Wayne ....

it actually confuses me why so many "long term" investors go out and buy BHP or CBA or whatever when they could write put options and collect the monthly premium and own the stock at a lower cost base if exercised ----- using this strategy at cycle bottoms seems a common sense/simplistic way to use options/buy stocks

does that theory still hold water or is my boat leaking :bowser:? ---

ps bear in mind i am in "option kindy"

Ageo makes good points. You have to be prepared to own the stock, then you can simply trade CCs over the stock (synthetic naked put). If that suits your view and goal. I actually did/am doing that with some banking stocks. I actually now own some very crappy bank stocks but the cost base is now so low (and in one case cheaper than free (C)), that I'm still holding and writing calls with some nice premium.

As far as the sense of it, I've done a blog post which attempt to pick the wings off the long stock, short put (and synthetic) and long call relationship, which I'll copy in a new post. (It's a thinking exercise to understand what you're doing).

Wayne, for some reason i have never gotten to really understand the greeks (perhaps im too lazy) but do you find it essential for medium to long term investing? i know the more knowledge the better but how useful do you find it for your longer term share investing?

I think it's critical for any options trader to understand the greeks. Sure you can "get by" as a long term investor without learning them, but it can be costly.