The break even points of synthetic longs are very confusing to me.
For instance:
- SPY synthetic long jun25@435 costs $115 (debit; $121 call – $6 put), break even at $558
- SPY synthetic long jun25@535 costs $19 (debit; $44 call – $25 put), break even at $555
- SPY synthetic long jun25@635 costs -$100 (credit; $4 call – $104 put), break even at $532
- SPY synthetic long jun25@795 costs -$262 (credit; ~$0 call – $262 put), break even at $518
It doesn't seem to make any sense and can't be that beautiful – if I pay money I should have a lower break even point than when I get money, no? The difference I would expect is the value of the interest rates. Other than that, so apart from different capital requirements, synthetic longs should be identical to long stock positions.
What am I missing here?
Synthetic longs break even points
byu/MoronicMumpsimus inoptions
Posted by MoronicMumpsimus
4 Comments
Only the second example you list could be considered a synthetic long.
A synthetic long is taken ATM. There is only one ATM point for spy. Today that’s 530. However when you take into account the risk free rate, the forward ATM point for spy would be slightly higher than that for the expiration of jun 2025 (perhaps around 560)
This is why you always use delta to select your strike for the synthetic long. Pick a put with -0.5 delta and a call with 0.5 delta.
Wether you can enter the position at a net credit or a debit depends on the amount of skew between put and call contracts. This determines your break even.
Selling a 730 put almost guarantees you’ll be assigned, and the call which is much cheaper will most likely end up worthless. Which is why you receive 262, the difference between 530 and the strike plus some extrinsic value.
The problem with the last position is mostly that the theta and delta of the two options don’t cancel each other out. So while it look like a straight line on the option profit graph at expiration, it is not in the time from now until expiration. you’ll mostlikely get an early assignment on your ass. Especially if the stock price moves down a bit.
as already mentioned a synthetic long is opened ATM, if you gap call and put you get a risk reversal and it technically is no longer a synthetic long
you could do a synthetic long and sell calls against it as a form of covered call without upfront costs for the stock if youre bullish SPY and want a downside reduction – also i would do synthetics on the XSP since there is no risk of early assignment
How did you calculate these break evens and where are these prices?
Are these real prices, cause isn’t #4 just arbitrage? If I buy SPY at $530 right now, and then buy a 795P for $262, I could execute immediately with no risk.
-530 – 262 + 795 = 3
This number should be negative. Or did I fuck up?
I don’t have much to add, thread already covered the most important points. All I got is, why do you care? Who cares what the expiration break-even is for the components of a synth? Are you planning to exercise the long legs? That’s the only time the break-even matters, is exercise at expiration.
If you paid a net debit of $19 for a synth long, you profit if you can sell the entire structure as a whole for more than $19 net and lose money if you can’t. That’s all that matters.