Wednesday, April 1st, 2015

Can you suggest a simple strategy that combines an option position and a position in the underlying asset…?

He has been following the stock options three months in the bank XYZ. You are not sure whether $ 9 is a fair price for the population, but estimated that the real volatility of 30%, less than 36% implicit in the price of stock options three months for $ 9 strike. Suppose the risk free rate is 3%. Can you suggest a simple strategy that combines options position and a position in the underlying asset to exploit this knowledge? A negotiation strategy delta-neutral sense?

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2 Responses to “Can you suggest a simple strategy that combines an option position and a position in the underlying asset…?”
  1. zman492 says:

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    One simple strategy would be to buy a number of shares and then sell at-the-money call options on twice as many shares. That would be the equivalent of writing an at-the-money straddle.

    < <>>

    Since you did not express any bullish or bearish bias, a delta-neutral strategy would make sense. The synthetic at-the-money straddle I mentioned would be a delta-neutral strategy.

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    I should add that I am not recommending writing straddles. There are other strategies I would prefer, such as a vertical ratio spread or a short calendar spread, but they do not meet the criterion of combining an option position and a position in the underlying asset.

  2. Mean Green says:

    My guess is the risk reward and tax issues are not worth using a delta neutral strategy at this time on a bank.

    I figure you could make a case for the bank and the government making the bank stock rip or one could make an exact opposite case.

    Either way a simple call or put will give you limited risk and less paper work at tax time.

    Whenever you use an offsetting position in a security regardless of what you call it, you have to us form 6781 for straddles.

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