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New Option Strategy
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Created: by kkjalan Attachments:1

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New Option Strategy

  #11 (permalink)
Elite Member
New York, NY
 
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Bookworm's Avatar
 
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What you are attempting is called a conversion: Long underlying vs. synthetic short (long put & short call at the same strike). It is also a way to price options and you will find it virtually impossible to put on profitably as a retail customer who has to hit a bid or lift an offer on just one of the options. Market makers don't give away money.

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  #12 (permalink)
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Kolkata , India
 
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Bookworm View Post
What you are attempting is called a conversion: Long underlying vs. synthetic short (long put & short call at the same strike). It is also a way to price options and you will find it virtually impossible to put on profitably as a retail customer who has to hit a bid or lift an offer on just one of the options. Market makers don't give away money.

Thanks for dropping by!

I nowhere mentioned that i am a Retail client, actually we are members of National Stock Exchange, and in my earlier post I had mentioned this is sort of a algo trade, wherein all the trades are entered and managed by a computer.

Trust I was able to explain you!

Frankly all I have been hearing is that this is not possible, but nobody cares to give proper logic to it,

I understand Market makers dont give away money, but then also we see thousands of jobber and algo trades are making money! so why cant I?

Regards,
Krishna

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  #13 (permalink)
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kkjalan View Post
Thanks for dropping by!

I nowhere mentioned that i am a Retail client, actually we are members of National Stock Exchange, and in my earlier post I had mentioned this is sort of a algo trade, wherein all the trades are entered and managed by a computer.

If you can get cheap commissions and the market is in-efficient then, yes it is possible.

Math. A gateway drug to reality.
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  #14 (permalink)
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traderwerks View Post
If you can get cheap commissions and the market is in-efficient then, yes it is possible.

Thanks!

will post todays result at around 1:00 PM GMT


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  #15 (permalink)
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Guys

Initial working are very promising will post the the complete working as soon as possible.


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  #16 (permalink)
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kkjalan's Avatar
 
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Sorry Folks,

Was down with fever, so couldn't compute the results and post.

The Results are:

Securities involved:
Nifty March Future[Future]
Nifty March 5400 CE[Call]
Nifty March 5400 PE[Put]

Transaction:

Buy: Buy Future + Buy Put and Sell Call
Sell: Sell Future + Sell Put and Buy Call

Total Trades : 9 (Both Legs considered 1)
Profit Trades: 7
Loss Trades: 2

SL : 1
Target: NA (Kept the Target very high)

Total Investment : INR .15 Mil
Profit [Net of TC] : INR 4840

Since I was sick today didnt record today's data...

Will do the working as per tomorrows market and post.

Regards,

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  #17 (permalink)
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  #18 (permalink)
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Tiberius View Post
With my strategy. There is an initial calculated risk that must be drawn down in four to five weeks. Another risk is the opening gap, it must be accounted for with market perception. And to do my strat, you need to know how to trade. And my IB account costs $ 0.10 to call or put 100 shares. Most options have an average commission of $1.00 per option traded. Shares are $ 0.50 per hundred. A person named Zsike is trading this strat in her journal.

Nice strategy. I was looking at something like this and it brought me here. I was looking at buying the 5-6 months NTM but the premiums would eat me up. Never thought of way ITM options to get rid of the premiums but still give you downside protection. I read Zsike's journal but it appears her strategy was to buy NTM 5-6 months puts or did I not read the correct one.

Guess I'm not seeing on your strategy what the major risk is. The risk I see is that you could have some gaps when buying and selling what you need to plus commissions. Seems like the first month premium would offset a fair amount of that though.

Never mind, I see the risk now.


Last edited by grand; February 29th, 2012 at 06:03 PM. Reason: I see the risk now
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  #19 (permalink)
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It's called a "conversion" and it's one of the most common arbs traded. Traded actively since 1973, actually. A guaranteed loss if traded marketable. There is simply no way to effect the position with marketable orders and beat LIBOR. You CAN trade reversals (short stock/long call/short put) profitably on HTB shares.

The risks are a dramatic change in rates and being pinned to the strike at expiration.

The only edge is a function of execution; you go long the shares and then enter the synthetic, ostensibly, on a small rally or some microstructure aberration. ONCE EXECUTED; the position PNL will not change unless rates are really moving.

The haircut is virtually nil because it's a small bet on rates.

The "Box" is a related arbitrage:

Long call/short put at x
Long put/short call at y

Now you have two synthetics; one long at x, one short at y. Profitability is measured by y - x - LIBOR. If you're long at a discount (embedding LIBOR) then you will be profitable. If rates rise greater than the discount then you lose. Hence the risk to rho.

Not to be an *ss, but there is nothing new here. It's a good idea to familiarize yourself with the mechanics, but not a great idea to be actively trading these. Your edge is on direction if you're executing these and beating LIBOR. IOW, simply buy and sell the underlying because the edge you see is a function of your execution on the "natural" (shares, futures, etc.), and not the options.

Fully 30% of Citadel's MMing in options is related to HFT netting of these.


Last edited by riskarb; March 2nd, 2012 at 11:36 AM.
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  #20 (permalink)
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The conversion(and reversal), box and roll are the "classic" arbitrages. The roll is simply a box on term-structure in which financing is "kinked". Long synthetic in Mar, short synthetic in Jun.

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