Q&A

Explore Your Options
Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it on the STOCKS & COMMODITIES website Message-Boards. Answers will be posted there, and selected questions will appear in future issues of S&C.

Tom Gentile of Optionetics

OPTIONS SYMBOLS

What do the various letters signify in an options symbol? - Name Withheld

The letters in an option symbol designate the underlying instrument, whether it is a put or call, the expiration date, and the strike of the contract. MSQAJ is a typical symbol. It would be broken down like this: MSQ (Microsoft Corp.), A (January call), J (50 strike).

Every option symbol has a root symbol one to three letters long for the underlying issue. Generally, the root symbol is the same as the stock symbol, unless the stock symbol is four or more letters. In the case of Texas Instruments (TXN), for example, the root symbol is simply TXN. However, for MSFT, the root symbol is MSQ. To make matters more complicated, if the stock trades long-term equity anticipation securities (LEAPS), its root symbol for the LEAP will be different until it is no longer a LEAP. This is because LEAPS expire anywhere from an additional one to two years out, and there needs to be a way to differentiate one from the other, depending on the length of the contract desired, since they all expire in January of each respective year.

The second to last letter of the option symbol specifies the month and whether it is a call or put. Calls from January through December are designated the symbols A-M, in that order. Puts from January through December are given the letters N-X (Figure 1).


FIGURE 1: OPTION SYMBOLS. Calls and puts are given symbols according to their expiration month.


The last letter of the option symbol designates the strike price of the contract. The letter A starts at the 5 strike, B is 10, and so on in intervals of 5 until 100. Then it starts over. At that point, if the stock has symbols for both $5 and $105 strikes, the last letter remains the same, while the root symbol will change. For symbols with 1/2 strikes (71/2, 121/2, and so on), the symbols are different as well (see Figure 2).

FIGURE 2: STRIKE PRICES AND SYMBOLS. Note different symbols for options with 1/2 strikes.


SYNTHETIC LONG POSITONS

I've heard that there is a better strategy than buying stock using options, which carries the same risk and reward. If this is true, how does it work? -MB, Seattle, WA

It sounds like you are referring to something known as a synthetic long position. Before getting into its positives and negatives, let's define it. Anytime you use a combination of one or more options to simulate something else, you have what is known as a synthetic position. It carries with it the same risk/reward ratio and looks identical to the original position on a risk curve.

In the case of a synthetic long position, what we're trying to "synthesize" is a long stock position. The way to own the equivalent of long stock would be to simply buy a call and simultaneously sell a put to amortize the time value in the call. Without any time value priced into the call, you now have a position delta of 100 - the same as a stock. For every dollar that the underlying stock gains or loses in value, the synthetic position will gain or lose as well. Let's take a look at a hypothetical example: 

Using Xyz = 50

Xyz March 50 call = $6

Xyz March 50 put = $6
So why would someone want to do this? To put it simply: margin. If you were to purchase the stock, the best you could do is put up only half of the stock price with 50% margin, and spend $25 of the $50 in our example. For short puts, however, most brokers require margin of roughly 20% of the stock price, plus the premium in the put, minus the difference between the strike price and the stock price. In our hypothetical, the margin requirement would be $16 [(20% of 50 = 10) + (6 for the put premium) - (50-50) = 16]. This creates a lot more leverage for the trader, allowing him/her to put up a lot less for virtually the same results as buying the stock.

The problem with this strategy, of course, is the unlimited risk you take on: You are selling puts short without a hedge. If the stock were to go to zero in our little scenario, for example, you would lose the entire $50, not just the $16 you put up. This is a no-no in my book, and I would strongly urge you not to use this strategy. There are better ways to accomplish the same thing. Consider buying a deep-in-the-money call (one or two strikes deep) with a delta above 80. By doing so, you will achieve much the same result as a long stock position, with far less risk than even a synthetic long position.


Return to March 2003 Contents

Originally published in the March 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2003, Technical Analysis, Inc.