Bought to open a synthetic put on EWU
Entered a position consisting of
- Short 1,000 shares of EWU, at $16.40
- Long 13 contracts of EWU calls with strike $16.00 and 7/15/16 expiration, at $0.45
Total proceeds of the position are $15,789.35, or $15.79/share.
Effectively, this is a synthetic put, slightly “ratioed” by 3 additional long calls, in order to bring the right tail of the pay-off diagram back towards break-even.
This is a protective position against the long AV position described in an earlier post, and against an additional (older) BBVA position in the face of the UK vote on EU membership on Thursday. Why not buy a regular put, instead of this? This position provides about $930 of protection at the recent EWU low of $14.86 and suffers a maximum loss at expiration of $712 at $16.50. At today’s prices, it would have taken 17 contracts of $16 strike puts to provide the same protection at $14.86. And that position would have a maximum loss of over $1000, realized at any price north of $16.