TSC Options Forum: Choosing Your Weapon

How Long Are You?

Remember the columns on the what and how of delta? Let's compare what happens to the two different positions of delta given hypothetical price points of gold in 30 days and the impact on equity.

Feb. 375 Calendar vs. Feb. 320/375 Synthetic
Gold Price on 6/30/03	Feb. 375 Calendar Delta	Feb. 320/375 Synthetic Delta
$365	0.25	0.95
$400	-0.08	0.82
$325	0.28	0.79
Source: TSC Research

Note that while the synthetic long delta remains fairly constant (meaning your profit and loss will essentially track the price of gold), the calendar spread becomes more bullish (a higher delta) as the price of the underlying falls and more bearish (the delta actually turns negative) as gold prices rise.

They're different positions, one is no better than the other. It may take time but finding the position that matches your anticipated scenario will be worth the effort. Regarding the first reader's question, if XYZ is trading at $50 and you expect it to rise to $60, you probably don't want to buy a call with a strike any higher than the anticipated 20% move. Any strike above $60 will presumably still be out of the money and therefore worthless come expiration. This doesn't mean you won't have the opportunity during the next six months to reap a profit from out-of the-money calls.

As a segue to last week's subject of shorting bond ETF's, some readers suggested that simply selling deep in the calls as a proxy for shorting the underlying shares. This a great alternative, but again, check the delta to understand just "how short" you will be given a specific strike and expiration date.

Thanks to everyone who responded to the question regarding their attempts to borrow and short shares of these ETF products. Of the 112 responses, 86 people claimed to have no trouble shorting TLT. While the experiences were all over the map, a few points could be gleaned. The dollar amount in one's account had little to do with the ability to borrow shares. One gentleman with just $5,000 in his Ameritrade account was able to short 100 shares on his first order entry. But more money didn't necessarily translate into being able to short more stock. People with close to $1 million in accounts at a variety of online firms were limited to selling 500 shares on any given day.

The other main lesson learned is that the squeaky wheel does indeed get the grease. A registered investment advisor (RIA) who has several managed accounts at Fidelity wrote he was unable to short shares. I wrote back letting him know that other readers with far smaller accounts at the firm had written in saying they were able to borrow the stock. The RIA placed a call to his human contact at Fidelity and quickly secured the stock loan.

>To order reprints of this article, click here: Reprints