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SELLING " Deep ITM Credit Spreads "....
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SELLING " Deep ITM Credit Spreads "....

  #1 (permalink)
Membership Temporarily Revoked
Memphis,TN
 
Futures Experience: Advanced
Platform: ThinkorSwim,FXCM, Ensign Software
Broker/Data: ThinkorSwim, FXCM
Favorite Futures: Futures, Forex, Options
 
mdsvtr's Avatar
 
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Thanks: 853 given, 28 received

SELLING " Deep ITM Credit Spreads "....

Something the other day came to me as I was scanning through different stocks on my TorS platform and I was looking at the " Mark " feature on the Options platform and started noticing that I could in theory, sell deep ITM credit spreads for more than the actual spread itself was.
Which would mean a FREE trade and no way to lose , or maybe I'm not understanding this correctly ?

Take for Example, a $1 spread on a BullPut spread.
I noticed that on some of these deep ITM strikes, I could actually sell them for $1.15 or $1.25
Which would mean, that I would " Make " money for selling that spread

Now I know that the probability of the stock hitting and thus exceeding the sold strike is not that great ( ranges from 15 - 30% probability ) , but if the right setup is there and you're virtually getting paid to put on the trade, why not do it, what's the worst that can happen ?

There are plenty of deep ITM credit spreads you can sell and get to where you're pretty much breaking even on the trade ( less commissions of course ), such as selling a $1 spread and receiving .90 cents credit , with only a .10 cent risk on the trade.
You definitely have to sell deep ITM and your probability of the stock exceeding the sold strike is not that favorable of course

What got me looking at this, was seeing explosive moves in stocks , and trying to risk $1 to make $4 ( assuming a $5 spread ) for example
So from looking through numerous strikes via the " Mark " , I noticed some were actually offering a Credit, higher than the spread itself

This is called finding/having an " Arbitrage " in the Options world I think ?

What would be cool, is to have a program that scans the market/ only those stocks that are optionable , and finds those with these Arbitrages

Anyways, just curios if any other traders look for and trade these types of trades
I have been looking for books that go int these and have not had any success and there's not much on the subject on the internet that I can find either, so maybe what I'm seeing on the Options chain is a mistake in the platform ?

Thanks for any and all discussion and insight

P.S.
I have attached some screenshots, showing the received credit for selling the spread, being higher then the spread itself

Thanks again - Michael

Attached Thumbnails
SELLING " Deep ITM Credit Spreads "....-2014-12-11-16-panw-bullput-deep-itm-example.png   SELLING " Deep ITM Credit Spreads "....-2014-12-11-gild-alot-different-arbitrage-deep-itm-strike-price-examples-bearish-bullis.png   SELLING " Deep ITM Credit Spreads "....-2014-12-11-gmcr-bearcall-spread-deep-itm-question.png   SELLING " Deep ITM Credit Spreads "....-2014-12-11-ssys-look-how-close-atm-strike-credit-recieved-exceeds-spread-itsel.png  
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  #3 (permalink)
Trading Apprentice
Nashville TN/USA
 
Futures Experience: Intermediate
Platform: Thinkorswim
Favorite Futures: Derivatives
 
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mdsvtr View Post
Something the other day came to me as I was scanning through different stocks on my TorS platform and I was looking at the " Mark " feature on the Options platform and started noticing that I could in theory, sell deep ITM credit spreads for more than the actual spread itself was.
Which would mean a FREE trade and no way to lose , or maybe I'm not understanding this correctly ?

Take for Example, a $1 spread on a BullPut spread.
I noticed that on some of these deep ITM strikes, I could actually sell them for $1.15 or $1.25
Which would mean, that I would " Make " money for selling that spread

Now I know that the probability of the stock hitting and thus exceeding the sold strike is not that great ( ranges from 15 - 30% probability ) , but if the right setup is there and you're virtually getting paid to put on the trade, why not do it, what's the worst that can happen ?

There are plenty of deep ITM credit spreads you can sell and get to where you're pretty much breaking even on the trade ( less commissions of course ), such as selling a $1 spread and receiving .90 cents credit , with only a .10 cent risk on the trade.
You definitely have to sell deep ITM and your probability of the stock exceeding the sold strike is not that favorable of course

What got me looking at this, was seeing explosive moves in stocks , and trying to risk $1 to make $4 ( assuming a $5 spread ) for example
So from looking through numerous strikes via the " Mark " , I noticed some were actually offering a Credit, higher than the spread itself

This is called finding/having an " Arbitrage " in the Options world I think ?

What would be cool, is to have a program that scans the market/ only those stocks that are optionable , and finds those with these Arbitrages

Anyways, just curios if any other traders look for and trade these types of trades
I have been looking for books that go int these and have not had any success and there's not much on the subject on the internet that I can find either, so maybe what I'm seeing on the Options chain is a mistake in the platform ?

Thanks for any and all discussion and insight

P.S.
I have attached some screenshots, showing the received credit for selling the spread, being higher then the spread itself

Thanks again - Michael

There is no arbitrage left... anywhere....for retail traders. The problem with your spreads...for example the PANW...is that the bid ask is 2$ wide. You won't get a fill at the mid price shown on your platform....ever. There is very little open interest and NO volume. And I'm pretty sure any of the 6 open interest is not going to pay you a loss to open.

If your still not sure put the order through for a 1 lot at 1$ GTC and see if it ever fills.

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  #4 (permalink)
Trading Apprentice
Reno NV
 
Futures Experience: Advanced
Platform: Wedbush/Lime
Favorite Futures: equity vola
 
Posts: 7 since Nov 2014
Thanks: 1 given, 3 received

Stop defining a spread by call or put. Calls are puts. A 60/70 DITM bull put credit is a 60/70 DOTM bull call debit. It's defined by the box arbitrage if limited to verticals (same duration) and by rolls (calendar). A $0.90 credit in a bull put vert is a $0.10 debit on the call spread.

Do you really believe that the sell-side is just sitting there and waiting for this thread? The box is a rate-arbitrage. You buy a $5 box for $4.80 + comms and earn 4% on your haircut... in a year. The strip is defined by these relationships. I automate box, roll and fly (symmetric and asym) arbitrage and I get one or two fills PER WEEK on nearly 300 names.

Your data is stale.


Last edited by convexxx; December 12th, 2014 at 02:46 PM.
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  #5 (permalink)
Trading Apprentice
Reno NV
 
Futures Experience: Advanced
Platform: Wedbush/Lime
Favorite Futures: equity vola
 
Posts: 7 since Nov 2014
Thanks: 1 given, 3 received

The 24/25 bull put vert is 0.70 mid. The vol is 24 on each, so assume that you fill the call spread at $0.30 to the buy. Pick one. They are the same (excluding fwd). What you should take-away is not the nonsense about an arb-fill, but the microstructure and its impact on your fills -- it's often easier (and safer) to buy the OTM call spread than to sell the ITM put spread.

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Last edited by convexxx; December 12th, 2014 at 02:55 PM.
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