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Synthetic Stock vs. Deep ITM Options

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

In a small sized account, there are two ways we can consider getting synthetically long or short outright stock with only a fraction of the Buying Power Requirement (BPR) of actual stock.

These two ways are synthetic stock (long/short put + short/long call) or a deep ITM long call/put.

An ATM (at the money) synthetic long has a clear advantage over outright shares in terms of BPR while carrying similar greek metrics. The 2 Standard Deviation call is even more BPR efficient. However, it does carry some negative theta.

For being short, the synthetic short and short shares carry the same metrics as the long versions. However, notice the 2 SD put is 3x the price of the 2 SD call and carries 3x the theta. This is because of put skew.

Because of put skew, it makes no sense to choose the 2SD put as your vehicle to be short. The BPR and the negative theta are far worse on the long put than they are on the synthetic call/put combo.

It is important to look at not only BPR, but also metrics that are extraneous to your overall goal, such as negative theta.

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