Synthetics

Question 1

Long Call

Answer 1

Long Underlying + Long Put

Question 2

Short Call

Answer 2

Short Underlying + Short Put

Question 3

Long Underlying

Answer 3

Long Call + Short Put

Question 4

Short Underlying

Answer 4

Short Call + Long Put

Question 5

Long Put

Answer 5

Short Underlying + Long Call

Question 6

Short Put

Answer 6

Long Underlying + Short Call

Question 7

Risk Reversal

Answer 7

Long Synthetic (Long Call + Short Put) + 
Short Underlying

Question 8

Risk Conversion

Answer 8

Short Synthetic (Short Call + Long Put) +
Long Underlying

Question 9

Long Box

Answer 9

Long Synthetic (Long Call + Short Put) @ Lower Strike +
Short Synthetic (Short Call + Long Put) @ Higher Strike

Question 10

Short Box

Answer 10

Short Synthetic (Short Call + Long Put) @ Lower Strike + 
Long Synthetic (Long Call + Short Put) @ Higher Strike

Done for a credit

Question 11

Long Roll

Answer 11

Short FM synthetic (Long Call + Short Put) +
Long BM synthetic (Short Call + Long Put)

Value: Typically Debit (Contango) if i.r. > 0

Question 12

Short Roll

Answer 12

Long FM synthetic (Long Call + Short Put) +
Short BM synthetic (Short Call + Long Put)

Value: Typically Credit (Contango) if i.r. > 0

Question 13

B/S Inputs

Answer 13

Interest Rate, Volatility, Strike, Underlying, DTE, (Dividends)

Question 14

If lifted on offer for a call, what is the synthetic hedge?

Answer 14

Buy Future, Buy Put

Question 15

If hit on bid for a call, what is the synthetic hedge?

Answer 15

Sell Future, Sell Put

Question 16

If lifted on offer for a put, what is the synthetic hedge?

Answer 16

Buy Future, Sell Call

Question 17

If hit on bid for a put, what is the synthetic hedge?

Answer 17

Sell Future, Buy Call

Question 18

Early Exercise Condition for Put Options

Answer 18

(1) Carry > Vol + Dividend
- Exercise put early to earn carry if we dont mind giving up the vol value and potential dividend
- More often, exercise put on ex-div date so avoid paying dividend at all (give up some carry value waiting for day however)

Question 19

Early Exercise Condition for Call Options

Answer 19

(1) Vol < Dividend - Carry
- Exercise call if dividend paid minus cash outlay needed to buy stock greater than vol value giving up.
- More often, exercise right before ex-div date to minimize carry.