Box Spread Arbitrage

drownpruf · Sep 2, 2013

Quote from chicagodon:

What would even be better then PM would be to have your company email address or your Bloomberg email whichever would be easiest to send you my rÃ©sumÃ© for a janitorial job at your firm?
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We're not hiring at the moment.

newwurldmn · Sep 2, 2013

Quote from drownpruf:

Right, but ignore legality.
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Ha.

A former boss described success in Wall Street as figuring out how to avoid toll booths.

drownpruf · Sep 2, 2013

Quote from newwurldmn:

Ha.

A former boss described success in Wall Street as figuring out how to avoid toll booths.
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Stay off the JFK.

stwh · Oct 2, 2014

Maverick74 said:
The advantage is stops. When I buy an option vs stock, I'm paying for the right to defer my stop. We all value things differently. For me, the value of a stop is priceless. What I mean by that is, the right not to NOT get stopped out of a trade.

Example: XYZ is trading at $100. Let's say the stock is breaking out. The whole world see this of course but it's still a good trade. Say I buy 100 shares at $100 and put my stop order at 96.00. Now I'm not looking to flip this for 5 pts, I want to make 15 or 20 pts or more. But this is one volatile stock. So now I'm long at 100, it goes to 103 and a few days later some analysts mumbles something about valuation and downgrades the stock. I could give two shits what some guy at "our research is worthless, inc" thinks about valuation but it does pull the stock back to 95.00 over the next few days. I get stopped out at a 4 pt loss. Sure enough, that was the swing low and it rallies back up, takes out 103 and sure enough, goes to 120....130....140....150..etc.

The other scenario is, I buy the DITM call, say the 6 month 90 strike call for 11.00. There is no decay on this option. I'm basically long stock. My risk is 11.00 if the stock were to collapse, but I would probably get out at 5 or 6 pt loss. So now the stock pulls back to 95.00. I keep my call as it's still trading at 8.00. Stock then rallies to 110...120...130...140..etc. I get out at 120 lets say and sell my call for 30 pts that I paid 11 for.

So in this example, I purchased the right to not get stopped out of my trade. Technically that right cost me 1.00 over 6 months. Or about two cents a day. Sure, one could say I bought the call for the leverage, but that is not how I price this opportunity. I price the value of the stop. You have to understand no matter what you are trading, the market is very messy these days. Even the BEST trades are going to shake you out. Look what TSLA did before it shot to 155. That was cruel. But that is what the market does today.

Now before you say, well if I get stopped out I'll just get back in. Well, how many times are you going to do that? Twice, three times, 5 times? Trust me, the market will take you out 5 times and then double. It's called murphy's law. You'll lose 5 times what your original stop was and still won't catch the move.

It's all about choice and what you value. I value not getting stopped out. My calls tend to be good. I do obscene amounts of spreadsheet work to get into the right trades and I trust my decisions. What I don't trust is the noise to follow. I can't control the rumors, the upgrades, downgrades, the chatter on CNBC, the rumors that some hedge fund is putting out there. However I also don't want to say "f*ck it" and not use a stop. That's how guys go from trading into selling used cars.

At the end of the day you have to make a choice. Nothing is free. You have to decide what you want and what you are willing to give up to get that. It's no different then any other decision you make in life.
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I like this post a lot, thanks for sharing the perspective.

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Box Spread Arbitrage

drownpruf

newwurldmn

drownpruf

stwh