It for the most part is 100 delta if you account for the fact that one, my avg holding time might be weeks to a month. So the embedded put I'm long is simply being borrowed. In other words, when I go to sell the call, I'm also selling the embedded put at market prices. And two, if I'm right on my call, the put goes away and the delta goes to 100. Put another way, all variables are accounted for.
Hi Maverick, Can you please explain in more detail how this is free money? Are you saying because the algo got a sale at the ask rather than at fair value of 2.20 by picking it off super fast milliseconds before the option bid ask had to change to 2.15 at 2.25 to accommodate the new price of XYZ and at which time one of the marketmakers asking 2.25 would have got the sale? If you don't mind, could you go into the mechanics of that? Thanks.
Just when you think there's not much here at ET, along comes this. Straight to the point. Simple to understand, yet a wealth of what seems like, duh, why didn't I see that before. As I'm trying again for what seems the umpteenth time to trade options, this little tidbit is quote helpful. Thanks. The whole thread is helpful.
Referring to what Mav was saying, I might be better off just looking at DITM calls with my trades. I was wondering this also, if someone can really real level 2 while trading stocks, is it possible to read the level 2 and prints of option trades and make money or would it be kind of a waste since theoretically the stocks will move first vs the options?
What do DITM calls have to do with trading a box? No, LVL2 will not be of use. Please re-read Maverick's post.
Nothing, the box question was answere by post 3 of the thread, I just didn't want to start a new thread.
As usual Mav is making some great points here, for simple trading you can look at options as a stock substitute. How many deltas would you like today 10, 50, 500, 5000, etc. So ChicagoDon you are long 25 deltas on your first spread. Therefore, you will make/lose 25 for each point, if you take the other greeks out for now and keep it simple (no theta, gamma or vega risk) you are long roughly 25 shares of GMCR, GMCR was down 2.50 today so 2.50 x .25 = .6250 so that is how much you are down end of day. Remember your basic synthetics, 100 shares of stock is roughly two at the money calls that are 50 delta ie 100 deltas. One of the problems is that people are at different points in their trading in terms of knowledge and strategy. You should understand basic synthetics, Cottle's book is good but you are at the deep end of the pool pretty quickly. Alot of people have gotten very rich understanding u = c- p http://www.wilmott.com/blogs/collector/index.cfm/2006/6/21/The-Discovery-of-PutCall-Parity
Thank you, I completely agree with what your said. I calculated the delta ratio and saw that it was only around .25 which was lower then it probably should be, I have 5 though. I'm going to study more about synthetics this weekend. I feel like I read Cottle and Nattenburg and understand it well, but practicality it's entirely different. Thanks for the link, I went back to Cottles arbitrage chapter and thumbed through it again. Are these types of call parity trades even available anymore? Meaning I assume someone has written an algo already to spot the arbitrage and execute it before I could even move my mouse. If not, I would assume to make it worth the retailer trader it would have to be pretty large to be able to cover all the costs associated with doing this. Again I could be completely off and I value everyone's help as I'm very new to options trading.