As a synthetic long replicates the P&L of ownership, I was wondering how to hedge it. If the stock goes under, happy to take delivery but wanted to understand how does selling calls above the strike price would work and its impact on margin (trying to do a covered call on a synthetic long position), but since I don’t practically own the stock, what are the pros and cons?
Hedging Synthetic Long position with “pseudo-covered" call
byu/snarain inoptions
Posted by snarain
4 Comments
broker will probably convert the margin requirements to be equal to a debit spread and a naked put
Basically then you have a CSP + call spread. Limit upside, protects a litte bit of downside but your protection is limited to credit received so id be doubtful of much margin relief.
Selling the call converts your existing naked call to a bear call spread. How much it impacts your margin would depend on your broker’s requirements for a naked call versus bear call spread.
The definition of a synthetic covered call is a cash secured put + shorting shares of the underlying with the number of short shares equal to the delta of the put. Similar risk/reward as a short straddle.