When you are trading with options it is very important to understand the Synthetics, which can save you a lot of money by narrowing the bid-ask spread and also can simplify your position, so you can have a quick grasp of what is your risk.
From the Put-Call Parity we know that (simplified, for European options):
Call = Put + Stock price - Strike.
That means that every Call can be seen as a put and vice-versa.
It also means that Call-Put = Long Underlying and Put-Call = Short Underlying.
So why is that important to us as traders?
Lets look for example at SPG (Simon Property Group):
After catching the BO as part of my vaccine game-plan:
I wanted to take the risk out of the market.
As you can see, the spread in the ITM call options is very wide (about 1$).
The spread in the puts is more narrow (0.4-0.1).
So how can I use the Put-Call Parity in order to take out my risk?
I can buy a put bear spread (long put 80 and short put 70) for 2.7$. (instead of buying just the put 80 which will cost me 4.05$).
That gives me the certainty that under 80 I will get back 25K which is more than I paid for the total premiums. (locking in gains).
But now you may think that my position is too complicated.
It is as follow:
call 70 +25
put 70 -25
call 80 -5
put 80 +25
call 85 -10
So how can I simplify that?
25 Call70 & -25 Put70 = long 25 synthetics (2500 stocks).
-5 call 8 & 5 put 80 = short 5 synthetics (-500 stocks).
So until now we have +20 long synthetics.
Now lets add 20 put80 (that remain) to the 20 long synthetics = 20 Call80
And we also have -10 Call 85.
To sum up:
We have a position which behaves exactly the same as the following:
+20 Call80
-10 Call85
Well, that is much easier to grasp.
Cheers.