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Using Synthetic Stock Positions for Short-Horizon SPY Trading

Article Quant Q&A · Author: mhu
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Summary

The document considers how to express signals from a price-based SPY algorithm, such as RSI and MACD, through options. It weighs short-dated weekly contracts and different strike choices: deep in-the-money options offer higher delta but cost more, while out-of-the-money options are cheaper and may show larger percentage price changes. Near-the-money options are also discussed in relation to implied volatility and theta decay.

The accepted answer suggests a synthetic long or short: combine an at-the-money call and put, buying one and selling the other in the direction needed to approximate exposure to the underlying. The response cautions that transaction costs matter for positions held only briefly. The discussion does not compare these alternatives with data, estimate costs, or establish which setup performs best; it offers a structural alternative rather than a validated strategy.

Key ideas

  • Short holding periods make transaction costs an important part of evaluating an options-based trading strategy.
  • A deep in-the-money option offers higher delta exposure but requires more capital.
  • Out-of-the-money options cost less and can have larger percentage price changes, but their suitability is not established here.
  • An at-the-money call and put combination can create synthetic exposure that nearly replicates the underlying.

Tags

OptionsEquitiesTechnical indicatorsDerivatives pricingExecution
Full text
# What kind of option would best be suited for a price based algorithm?


# What kind of option would best be suited for a price based algorithm?












So say I wanted to make money off of a simple RSI-MACD algorithm on SPY (ofc this may not necessarily make money, but let's say it does). I'd like to leverage my returns using call and put options, but I'm not sure what kind of option would be best.

First I'd imagine I'd want to use weekly options that expire very soon since I'll only be holding a contract for max 60-90 minutes where theta decay should be manageable.

Though after that I'm really not sure about what kind of strike price would be best. Normally you'd want a deep ITM option so that you have a high delta and low theta, but I'm not so sure. One benefit of options that I'd like to maintain is the high leverage with low downside risk (in cases where trades go very wrong), and ITM options are expensive. Also, looking at options chains myself, I often notice that OTM options are usually more price sensitive % wise, all the while being much cheaper (and thus less downside risk).

Then there's also a case for Near-the-Money options because of the options smile, thus, in the case of the underlying moving either up or down, IV will increase, keeping my premiums (relatively) high. Though Near-the-Money options also experience more theta decay.

So what's the best bet? Or is there no best bet?

## Answer by Quantoisseur (score 3, accepted)

https://quant.stackexchange.com/a/57102

You may be looking for synthetic longs/shorts which would be buying/selling an ATM call and selling/buying an ATM put. This will give you leverage while nearly replicating the underlying.

I would caution that if you're only looking to hold for a couple hours, you will need to seriously consider the transaction costs.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.