I was thinking, if nothing else, the magnitude of natural demand for way-below-current-price options would come in


1) buy puts,

2) write puts,

3) buy calls,

4) write calls.


By the time thes options became at-the-money, natural demand would have become,


1) buy puts,

2) buy calls,

3) write calls,

4) write puts.


So at entry, the current price of the synthetic put would be dictated by arbitrage. Meaning, the call would mainly have competing buyers to the extent they could still yield an arbitrage profit to a hedger, offsetting any excess natural demand selling to straight put buyers - who pay high commissions - and call sellers dynamically hedging against straight stock would, I don't know, also probably be natural sellers of volatility?


So, if nothing else, if you are in the pool of people to whom puts offer a natural hedge, and you have low friction/commissions, the synthetic put could offer a hair more free money than the put itself. Then, when we get to the exit side - meaning if the market dives - the arbitrage between at-the-money puts and calls should tighten, at the same time as we are in a position to leg out of the tough/illquid side - the calls - more easily as the market goes against us than we could if we were in puts and, instead of trend-trading, we were forced to pick a bottom.


There is one more angle to the "free-money" spread that I can't think of right now. I originally thought of it in traffic, and I just don't remember. Maybe you can think of it, or at least shed some light of actual experience on the scenario! I'm sure you get the idea, and I am no options trader anyway.


leroy