Synthetic Bull Call Spreads

The Rationale (The "Why")

This is a capital preservation and protection strategy, intended for use in times of high volatility and a falling market. It creates a position that protects held/bought stock for a total price that is less than the stock's guaranteed value at expiration, thus offering 100% downside protection as well as a minimum profit regardless of what the stock price does. It also offers a chance of much larger than minimum profit if the price "punches through" the spread or reaches it before expiration.

The result is a powerful trade with a guaranteed profit floor and significant upside potential if the stock rallies, all established for a single net debit.

How to Trade It (The "What")

1. The ticket shows a Floor P (Floor Profit). This is the guaranteed minimum profit if the trade is held to expiration. This profit, as well as the cost of the call spread, is covered by the captured dividend and the carry (risk-free rate paid by the market) in the synthetic position. Note that the cost of this trade is quite high by comparison to the average options trade, since this structure requires buying the stock itself (100 shares per lot.)
2. The ticket also shows a Peak P (Peak Profit). This is the maximum potential profit, which occurs if the stock price rallies to or beyond the upper strike of the call spread by expiration.
3. The Maximum Loss on this trade is negative - i.e., the Floor P is the minimum return.
4. These positions are best entered on down days, since the increased volatility provides larger swings in the rather inelastic price of stock plus a long put. This requires working the limit fairly hard - getting in at the mid price would be ideal, but happens very rarely in my experience. Waiting for a red day and putting it out at a bit above mid is the best approach I've found. If no one bites for an hour, I rebuild using the new prices and offer at a few cents higher. This, of course, directly reduces the Floor P by $1 for every penny. If I can't enter for 5-10% of the Floor P over mid - i.e., if the ticket says that the minimum return is $150, the max I'll offer is $0.15 over mid - then I'll try another day, or perhaps on a somewhat more volatile stock.