I'm sure many of you are aware of this, but for those who aren't.
Say you want to buy a call contract with a $100 strike, Sep 20 expiration on Company XYZ, whose price is currently at $129.37.
The cost for the calls would be $31.20 per share, or $3,120 for the contract. Breakeven at expiration is $131.20. Max loss of $3,120.
Due to put-call parity, we know that the P&L of a credit put spread is equivalent to a debit call spread for the same strikes and expiration.
Given this, we can split up our $100 call purchase into two segments: a credit put spread coupled with a long call.
Structure:
BTO Sep 20 $130 call for $9.65/share ($965)
BTO Sep 20 $100 put for $1.19/share ($119)
STO Sep 20 $130 put for $9.80/share ($980)
Net cost is $9.65 + $1.19 – $9.80 or $1.04/share ($104).
Breakeven at expiration is $131.04.
Max loss of $3,104.
The P&Ls are equivalent.
Note that you'd need coverage (margin/collateral) for the put spread; in this example, if done with cash collateral, it would be $3,000 cash collateral ($30 spread x 1 contracts x 100).
Bonus: Use the blended structure, sell a $172 call, and it's a costless transaction.
Note:
You'll notice you can do a call BTO $130 and put STO $130 for free. This is a synthetic long.
By adding the put BTO $100, you're essentially converting back that synthetic long to a long call (a call is equivalent to being long the stock plus a long put).
[Edited for clarification.]
[Further edited to dumb it down.]
Tip: Using Put-Call Parity to Reduce the Cost of Entry on a Long Call
byu/LabDaddy59 inoptions
Posted by LabDaddy59
3 Comments
Max loss 31,040 vs. a long call. How about we get a right, not an obligation .
I always say if you are crediting anything, you need to be obligated to buy the shares. Don’t ruin your account with going over leverage.
I would argue that only 10 percent here have 30,000 to put as collateral, so you’re texting to a small audience.
Remember: the upfront price is not important. What’s important is margin price, maintenance costs, and risks.
If the upfront payment is important for you, your portfolio is tiny and cannot be meaningfully used for anything, except buy-and-hold.
The markets stopped being wsb friendly since April. Don’t blow your money on high risk low reward bets. Not only you are buying calls when it is too late (unless you think that IV for the day after earnings is highly underestimating max rally or don’t understand how hard it is to profit from calls after an iv crash) you wanna sell puts.
TLDR….. OP is long calls and he/she is short a put credit spread.
Using the “blended structure” by selling the $172 call makes this a long debit call spread and a short put credit spread.