Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Edition by Sheldon Natenberg

Author:Sheldon Natenberg [Natenberg, Sheldon]
Language: eng
Format: epub, mobi
Publisher: McGraw-Hill Education
Published: 2014-11-21T00:00:00+00:00

Long a put

Long an underlying contract

If we want to maintain this position but would also like to eliminate the risk of holding an underlying position, we might replace the long underlying position with something that acts like an underlying contract but that isn’t an underlying contract. One possibility is to replace the long underlying position with a deeply in-the-money call:

Short a call

Long a put

Long a deeply in-the-money call

If the deeply in-the-money call has a delta of 100 and therefore acts like a long underlying contract, the position will have the same characteristics as the conversion.

In the same way, instead of buying a deeply in-the-money call, we can sell a deeply in-the-money put:

Short a call

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