Making a Synthetic Stock
HTML-код
- Опубликовано: 11 окт 2018
- Synthetic stocks are investments that replicate a stock's return; in other words, they earn money from a company's success despite having no ownership of the firm. Today, let's go through the exercise of creating one so we can better understand just how capable the world of options truly is.
NOTE: As mentioned, this example is grossly oversimplified and doesn't take into transaction costs nor contract sizes.
Intro/Outro Music: www.bensound.com/royalty-free...
Episode Music: freemusicarchive.org/music/Pod...
DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.
Being a finance nerd is the best.
Are you milioniar?
@@xxd5doo5xx89 some one who can actually spell millionaire is more likely to be one than one who can't. But ... being able to spell it won't guarantee becoming one either. Why I'm not one...yet.
@@AlexanderTheGoodEnough English isn't my language I'm still learning. That's for correction it's a millionaire now I know
@@xxd5doo5xx89 take my grammar seriously, but don't take ME seriously 😋.
@@AlexanderTheGoodEnough 😅😂👍🏻
This video made me realize how much of an ape I am. 💎🙌
I studied this subject in college and took me some hours to comprehend the mechanics, but with your explanation it's so much easier. Great vid!
I did enjoy this. You have a great way of making complicated math/investing interesting. I would definitely be interested in watching a longer version of this going through all the ins and outs of the underlying mechanisms, and specific examples of how people have used them in the past.
You are great.
You can explain plainly very diifficult subjects and make them accessisble to everybody.
This was actually very hard to understand, but you made it accessible. It is one of your best videos.
Keep on with the good work and congrats.
Also, huawei uses this to ensure that although their workers are compensated as though they are owners, they are not actually owners of any equity in the company.
Curious, but why would they do that?
If you already are compensating the employees via the value of your company's stock, wouldn't it make more sense to just pay them in stock rather than try to replicate the stock?
Also, where did you learn this? I would really love to read more about it! It sounds super interesting!
@@diamondwave100 ig they probably don't want to give the power of owning the company or something ig idk just guessing
You forgot to say "And with that said, we're out of time."
Pull ya head out man
I am not going to pretend I understand a word of that. :(
That's alright, it's certainly a more complex topic than normal; I have another video on options that may help clarify a few things (this video is a sort of follow up to the option video) but again its a tough topic to cover in under 10 minutes haha
Definitely interesting, didn't understood some words, but was interesting to watch non the less!
no words can justify how much you have helped me. Thank You so much. I think i need to practice on excel to come up with the cash flow to get a better grasp.
I would really love a follow up video on this subject and how it's played a major part in the GME saga
cheers dude
Yes!
Also commenting for an update via GME
Well explained. Quality. Thanks 👍
I loved the way you've explained!
Thanks for the videos.
If you teach CFA with exactly this visual way I'm ready to pay 5000$
So good just need more videos from you 😃
Loved this video still digesting it all
Thank you very much
Yes. New video
It was certainly interesting, and I'm fairly confident that I understood at least 25% of it!
Beautiful
I love your videos, and this one was great as well! I have had the following question for a while, and was hoping that maybe you could make a video answering it. Why do nonvoting non-dividend shares hold value? I haven't found a satisfactory answer yet and would appreciate an explanation. My guess is that it has to do with laws put in place by the SEC, but I am not sure.
I'll answer that next Q&A video! Should be one of the next few videos
Awsome video. Very interesting. Arbitrage is obviously for the big dogs but this was really interesting in presenting a different perspective of investing that I would have likely not even considered. It gets you thinking. Anyways keep it up this is great.
I love these 😭 don’t ever stop making nerd videos
Simple equation C = U + P is helpful to derive synthetic relationship.
C is call option
U is stock
P is option
+ Sign is a buy and -ve sign indicates sell.
"we aren't changing to an options strategy channel"
b-but what about your fans that love derivatives? :'''(
I'd love an explanation for Iron Condors/Butterflies because I still have no idea...
Thanks for the great video! Very informative and well-explained as always.
Could you also make some videos on the topic of "futures", in terms of what they are and how they work? I'm sure they would be greatly appreciated by myself and many others. :)
I will definitely get to the topic at some point in the near future! Thanks for the positive feedback :)
I've been watching all your videos but this one and the Stock Options one made my brain shoot out of my nose. MY poor brain just can't take it.
Fair enough! They are definitely more complex topics. Wishing your brain/nose a speedy recovery
Thank you for sharing this! It definitely made this easier to understand
Could you do a similar video for tracking stocks as well?
I feel like I kinda understand how they work, but don’t really understand why an investor would by one if they don’t really have a right to the assets and only a possibility to a future dividend? If I’m understanding it correctly lol
Please do more videos like this
A++ for youuu
I’m still trying to make sense of all of this so the answer to my question may be obvious, but would futures not give roughly the same payoff characteristics at a lower cost basis? And just to make sure I’m understanding correctly, would forgoing the treasury portion of the synthetic stock simply put you into a highly leavened position with just a slight offset return characteristic (in absolute terms not percentage) from the stock? Great videos btw, they’ve helped a lot to give me a foundation before university! (Also incredibly interesting to watch)
Very interesting, and seemingly convoluted. But I'd like more on time value of money and practical applications of it
You should do CFA prep vids
Plain Bagel mentions that this synthetic stock can be used when the investor believes that there are arbitrage opportunities, but does it ever make sense to leg into this position when you already have part of the trade? For example, if you've bought a call option and the stock price has moved in your favor, you could sell a put to squeeze a little more money out of the trade. Or if you first planned on selling a cash secured put but changed your mind about buying the underlying, could you use this to cover your bases in case the contract is exercised?
Are these synthetic stocks related to the synthetic CDOs that crashed the housing market in '08?
Marcos Núñez no, although the synthetic CDOs were constructed in a similar way.
Reminded me of my CFA level 2 exam
i just did call and pu option in university, so thi swas very interesting.
Synthetics are a subject I'm interested in. What books would you recommend for a Beginner???
What books would you recommend to become a finance nerd?
how do negative interest rates affect syntactic stocks?
Definitely a little too advanced for me but very interesting none the less!
What about dividends????
but in this case you will not earn dividends rigth?
If the stock pays a dividend, then wouldn’t the synthetic stock not properly track the underlying? Only actual holders of the stock receive the gains from dividends right?
How do synthetic shares work? How are they created? Do they come from creating a synthetic stock? Apparently hedge funds can use synthetic shares to drive down a stock price like on AMC allegedly.
Are these risk free bonds just government treasuries?
How long do you hold this synthetic stock ? "Arbitrage opportunity" -> seems like short term.
It would definitely be short-term; a synthetic stock would only exist for the duration of the options life (in this example, 3 months). Even still, many people looking to arbitrage could lock in their risk-free return instantly from my understanding, though I may be mistaken there
I liked the thought expirament, being a mathematician actually means that thought expiraments are literally in the job description, but O do have a question... Why would you want to also mimic the loss part...? I mean, yeah you're paying a small premium otherwise, but you guarantee that the end resul will be net positive, or at least net non-negate.
Funny how no one paid attention to this 2 years ago and now we are fighting synthetic shares and naked shorting 🦍🦍🦍🦍🦍
interesting
Useless to me as an index investor, but oh so cool. Thanks for the video.
Knowledge is never useless. I'm not interested in this kind of investments either but always good to learns new things!😉💪
How about dividends? Are they paid to the owner of a synthetic stock? Thanks
No
I strangely understood yhis
What happens to the plain bagel synthetic stock after the trade is complete?
after expiration of the options it becomes an actual physical share
How much is the arbitrage amount in percentage on average ?
approximately 0%
Pretty fun, but why not just enter into a CFD?
Can this synthetic stock affect the movements of the the actual stock it is mimicking?
Given that you asked this half a year ago I have a feeling I understand why you asked. The answer to that is no, not in that sense.
Not directly
🤯
What’s the benefit of doing this versus just buying the underlying
The benefit is primarily for when the pricing is slightly different from the actual stock (I.e. the synthetic stock is slightly cheaper than the actual stock)
Grossly simplistic 😂 😂 😂
You should've touched on synthetic shorts.
A benefit of synthetic stocks made only of options is they are cheaper. Instead of holding a margin balance to buy stock, you can buy the cheaper synthetic stock to avoid paying margin interest. You use up about the same amount of buying power, but with stocks, it’s costing you interest. With synthetic stocks, it just costs buying power. Of course, this is irrelevant if you don’t trade on margin frequently.
AMC and GME in a nutshell 🚀💎🙌🦍
I like your video but it's advanced with the graph.
I am a newbie looking for information on synthetic assets and this wasn't entirely helpful 😩
So this is how hedge funds are creating the 'synthetic' long shares, and report them as if they are closing their short positions on AMC, GME and other stocks that they heavily shorted with naked short selling.
I have to do more research on it. For one how are they sold and is it legal to sell them as “stocks.” Treasury Bills too.
The Synthetic Stock allows the owner to replicate the returns/loss of a stock without owning it outright, thus he can pay less capital upfront and still replicate the returns ?
Ah. I'm gonna trust you on this one. They use complex math to replicate the rise and fall of the original stock, got it
no matter how much I love finance, derivatives is beyond me haha
Basically making a stock out of this air. AMC AND GME.
A shell game to make scammers (banksters/brokesters) rich
I did get a headache from this one
why would someone buy a synthetic stock option than stock itself? The investor would have less margin requirement than if he brought 100 shares up front. why does the short put have less credit? not true, depends on the underlyings iv, if iv is high the short put would be more expensive to sell and if the underlying had lower iv, the long call would be cheaper.
If you make a synthetic share using the put call parity and buy a risk free bond, then I believe the amount you invest should be the same. Without the bond, yes there’s a significant difference with the amount of money required upfront.
To the second point, I’m not sure what you mean by iv but I agree that puts are certainly not always cheaper than calls. Dividends are a great example of something that makes a call cheaper than a put, and certainly the strike price versus the current stock price matters. However, if the two options are at the money, and there are no dividends, like we have in our example, then the put is typically cheaper
@@ThePlainBagel IV stands for Implied Volatility. My understanding is that it's a computed value stemming from the Black-Scholes equation for how to value an option.
Option valuation involves controlling for various factors as extraneous to the bet because for every buyer there's a seller and presumably both are factoring in the effect of the known quantities. Once you control for the risk-free rate, time left to expiration, and the difference between the current stock price versus the option's strike price, (and a few other variables, like dividends) you must believe that the underlying is going to change how volatile it is before it makes sense to buy or sell an option.
There are some who believe that one should sell options when the IV is quite a bit higher than the underlying's volatility has been historically (usually shortened to HV). They ascribe to the irrational investor hypothesis because the IV is usually higher than the HV. I suspect it's higher because the underlying experiences periodic shocks, so the higher IV represents a "smoothing out" of the values. In effect, nobody knows when a stock price is going to jump in price, and so they value buying options more than selling options just in case.
Why would an average investor do this? To DRAMATICALLY reduce margin requirement. Being a nerd isn’t always well rounded intelligence.
I listened and have 0 understanding
AMC Gme bring anyone here😂
So many useless comments here. All the "thank you" and "your great" crap its just taking up space and wasting people's time having to scroll past it in order to see constructive comments which creates a discussion we can all learn something from. Yea the guy is good but do we need to take up the whole comment section about it?
Then generate 5 billion amc shares and steal!
Seems like you did your best but the video was not comprehendable