Advanced Micro Devices Inc (AMD)

[HailMary]

There seems to be an infinite supply of people willing to buy puts. There are many cases where buying puts is a part of another overall strategy (a protection or hedge generally). So they are not really poor saps. You cannot tell by looking at a single purchase what their objective is. Regardless there are people buying puts all the time, and they're asking for a time value premium. That time value premium varies hugely as you have noted. On the other side you are buying the call, and in this case you are paying the time value premium. The neat thing is this time value premium is exactly the same as the put when the stock value equals the strike price. And then as the stock moves up and down the time value is inversely proportional so that they perfectly cancel each other out. The put time value may go up, but it will go up by the same amount the call time value went down.

To execute the synthetic stock requires only paying the spread (.05) and extra commissions. Nothing else. Go try it and see for yourself. I don't think I can convince you in any other way as to how it works.

I was going to describe how you don't have to even wait for the stock to hit a strike price to do this strategy and either receive cash or pay cash in advance. I'm not sure I have the desire to make it more complicated than this base example.

Another side thing to think about. I want to buy 100 shares of a company, but I don't. It is selling for $15. Instead I write a $15 put on it that expires next month. The put buyer pays me about $.50x100 = $50. This cash immediately appears in my account. Next month the stock is at $14 and the option expires. I get assigned the shares, and I have to pay $1500 to buy them, but I still have the $50 from before, so my price is really $1450 (in fact for tax purposes you roll what you made in the option write into the cost of the stock). In effect I just bought the shares for $14.50. The put buyer made $100, but I still got to buy shares cheaper than I would have had I just made a straight purchase. Win-win for both sides.

HailMary