Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
Trading: Equities, index options and futures/futures options
Posts: 190 since Apr 2010
Thanks Given: 66
Thanks Received: 198
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.
Can you help answer these questions from other members on NexusFi?
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?
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.
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.
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.
