Making Synthetic Options:

Here you are combining Vanilla Options to come up with Complex Synthetic Options.

What do I have?

I have two versions of Option Maker:

One is a code-based Option Modeller: The first three modellers at

It has three modellers: A Single Option Modeller; Two Option Modeller; Four Option Modeller.

You type in “y” to say “yes, I would like to use this option”, and you may choose to type in “b” to buy the option. If you leave the second box ‘unchecked’, you want to ‘sell’ the option.

The other is an excel-based Option Modeller: The last one at

If you can handle all the parameters at once, this is the best one to work on.

Both types of Option Modellers were developed for FOREX options or Foreign Currency Options. Thus, there is the name of “Currency” before Option Modeller.

Why are they called “Modeller”, not models?

A dictionary says:

Noun / 1. / modeller-apersonwhocreatesmodels
modeler

No kidding- it is not just a model, but it actually creates models for you!

(if you have some knowledge of options, then skip the next section and go to Section entitled “Let’s use the Modeller, the excel-based Four Option Modeller” below.

What do we have to do?

First, use the single option maker, and get familiar with the Call, Put, and Buying or Selling.

You will also get familiar with the movement of the interactive payoff line of the option.

Do not change other parameters than X or Strike Price. All other parameters have been adjusted so that you would have nice pictures.

Change X or Strike Price, and then you will notice that the Pay Off curve moves up and down. That is all that you have to do in this course.

Now you may move onto the Two Option Maker.

You can now may Straddles, and Strangles.

To get a Straddle Long, buy a Put and a Call at the same strike price.

You will make profits if St+1 shows more than a certain range of movement.

For Straddle Short, you must sell a Put and a Call at the same price.

You will make profits if St+1 little movement.

You can also have Strangles at a lower premium:

Let’s use the Modeller, theexcel-based Four Option Modeller.

This is the last modeller on .

For the best illustration, I have calibrated all the parameters on the modeller.

Make sure that all the Strike Prices or Xs are all set to equal to 0.70. Do NOT fiddle with other parameters.

You are controlling only three things:

1)Strike Price X, by clicking arrows in the box; clicking the left-side arrow decreases the value of X and clicking the right-side arrow increases the value of X;

2)using or not Call #1, Put #1, Call #2, and Put #2, by checking the boxes just in front of “Call #1” and so forth; and

3)and (in using) buying or selling Call #1, Put #1, Call #2, and Put #2, by not checking or checking the box preceding them.

Do some jiggling so that you know what the above instruction means.

Now let’s make a Butterfly(long).

It will be done in three steps: First, you will make a Straddle; Second, you will make a Butterfly (short); and then you will get a Butterfly (long).

I would like to show some really unnecessarily complex illustrations elsewhere;

After reading them, and comparing them with my illustration here, you will be convinced how easy it is to make a seemingly complex Synthetic Option by using my option makers. The secret is that you do not calculate and make them as others do, but you first make it graphically and figure out what the components are as I do here.

Now, let’s move on.

Step 1: Making a Straddle long.

Use Call #1 and Put #1 to get the Straddle – check the box for “Use Call #1, and for “Put #1”, and check the second box –meaning ‘buy’- for “Buy” for call #1 and “Buy” for put #1.

Make sure that you are Call #1 buy and Put #1 buy at the same value of X, which is set to be 0.7 in the original setting.

You will get a Straddle. This is a Straddle Long.

Step 2. Making a Butterfly.

It is a little tedious as you will have add more Call and Put and adjust their Xs.

Now check the first box of Call #2 but leave the second box unchecked. This means “You are using Call #2 and selling it”.

For this Call #2 Short/Selling, now please, slowly change the value of X to a higher value, such as 1.0, by clicking the right side of arrow in the box below “X” of Call #2. You will an interesting figure.

At this time, you may move onto another option.

Now you check for Put #2 and leave the second box unchecked for ‘sell’.

For this ‘Put #2 Short/Sell, please, change the value of X a bit by bit to a lower value, such as 0.40. You will get a Butterfly (short)

This is Butterfly Short.

What if you wish to a Butterfly Long, not short.

Step 3:

Leave all the check boxes for the use of calls and puts as they are, but change the checks(second checks) only for the buy and sell opposite to what they are are.

For instance, it will be Call #1 buy at X=0.7; Put #1 buy at X=0.7; Call #2 sell X=1.0; Put #2 sel X=1.0.

Walla, you will have a Butterfly Long.

We have not done any calculation but we have got the Butterfly. And we know what single Vanilla options we have to buy or sell to get the butterfly Synthetic Option.

Are you convinced that this visual way by using the Option Maker is superior to numberical/mathematical ways?