Stocks & Commodities V. 23:3 (37, 71): Q&A by Don Bright

Stocks & Commodities V. 23:3 (37, 71): Q&A by Don Bright
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Stocks & Commodities V. 23:3 (37, 71): Q&A by Don Bright

SINCE YOU ASKED

Confused about some aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading corporation, answers a few of your questions. To submit a question, post your question to our website at http:// Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.

CONVERSIONS

Q: I understand that you were a trader on the options trading floor. Would you please explain what a conversion is? I have heard that they are risk free. How can that be?ózdreg

A: First off, the basics are pretty simple. If you buy stock, say at $53, and sell $50 strike price calls and buy $50 strike price puts, then you have a conversion. If the stock goes up or down $10 (or any major move), you will not make or lose any money. The price of the calls and puts together will work out to be around $3.00 ($50 strike price, plus the difference between $50 and $53). The call and put together are your synthetic short position, and the stock is your long position. . .




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