Replies to post #18365 on Advanced Micro Devices Inc (AMD)

[HailMary]

HailMary, did you mean that? -

I meant it, but I didn't state what I meant very well. I was trying to state the SELLING the put and BUYING the call at the same strike price using this strategy results in a cancelling time value. Today I grabbed some data when AMD was exactly at 17. With this I can illustrate the synthetic stock purchase and also the cancelling time value for any strike price.

 
 Dec 16.00 Call CBOE 1.50 1.65  Dec 16.00 Put CBOE 0.50 0.65 
 Dec 16.00 Call Amex 1.50 1.65  Dec 16.00 Put Amex 0.55 0.70 
 Dec 16.00 Call Pacf 1.45 1.60  Dec 16.00 Put Pacf 0.50 0.65 
 Dec 16.00 Call Phil 1.55 1.65  Dec 16.00 Put Phil 0.55 0.65 
 Dec 16.00 Call Ise  1.50 1.60  Dec 16.00 Put Ise  0.55 0.65 
 Dec 17.00 Call CBOE 0.95 1.05  Dec 17.00 Put CBOE 1.00 1.10 
 Dec 17.00 Call Amex 0.95 1.10  Dec 17.00 Put Amex 0.95 1.10 
 Dec 17.00 Call Pacf 0.90 1.05  Dec 17.00 Put Pacf 0.95 1.10 
 Dec 17.00 Call Phil 0.95 1.10  Dec 17.00 Put Phil 0.95 1.10 
 Dec 17.00 Call Ise  0.95 1.05  Dec 17.00 Put Ise  0.95 1.05 
 Dec 18.00 Call CBOE 0.55 0.65  Dec 18.00 Put CBOE 1.55 1.70 
 Dec 18.00 Call Amex 0.55 0.70  Dec 18.00 Put Amex 1.55 1.70 
 Dec 18.00 Call Pacf 0.55 0.70  Dec 18.00 Put Pacf 1.55 1.75 
 Dec 18.00 Call Phil 0.55 0.60  Dec 18.00 Put Phil 1.55 1.70 
 Dec 18.00 Call Ise  0.55 0.65  Dec 18.00 Put Ise  1.55 1.70 
 

These are option quotes for December on AMD when AMD was exactly at 17. Today I could have written 100 Dec 17.00 Puts for 1.00 on CBOE (best bid was 1.00) giving me $10000 in cash. I could have then in turn purchased 100 Dec 17.00 Calls for 1.05 on the Pacific exchange (best ask was 1.05) for $10500. This is a spread of .05 that I suggested yesterday was possible. Add in commissions of roughly $320 for these 2 transactions results in a total of $850. I could have instead purchased the stock for $170000 plus a small commission. If you factor out the commission and the spread, these positions will behave exactly the same regardless of where the stock goes from here on out. There is no other variable here. At expiration, I'll have to cough up $170000 to purchase the shares through either a put assignment or a call exercise.

Also you can still do a synthetic position at strike prices that are not equal to the price of the stock currently. Say instead I wrote 100 Dec 18 Puts for $1.55 giving me $15500 in cash. Now I buy 100 Dec 18 Calls for $.60 for a total of $6000. I'm left with $9500 in cash. Factor out .05x100 for the spread ($1.00-($1.55-$.60)), and it is $10000. It is no coincidence that this is equal to the (strike price - the current price) x 10000. At expiration I will need to cough up $180000 for the shares, but I have the $10000 advance that can be applied to it effectively making it $170000, which is the same as the above example. I'm again buying the stock at $17, only this time I'm getting an advance of cash. You can do it the other way too with a 16 strike price, although this time you pay cash in advance instead of getting it.

The last paragraph also demonstrates that the time value of puts and calls at the same strike price is equal. The time value of Dec 16 options is roughly $.60. The time value of Dec 17 options is roughly $1.00. The time value of Dec 18 options is also roughly $.60. This is why the synthetic stock purchase behaves exactly like a stock purchase.

I've beat this one to death now. I just wanted to follow up with some real quote data for illustration.

HailMary