No argument there. For independent traders using a retail broker, you have got real slippage and commission problems to be sure. Some of the registered pro's I know (trading for a firm) tell me that day bullets are very common hedges they can request within the firm and have delivered to their accounts. The costs to the trader are fixed I believe. The traders themselves don't even set them up--- the firms do this for them (unless presumably the trader has specific instructions). My point in the original post was to mention that day bullets (long stock/long ITM puts) generally do not involve the selling of calls. Joe Retail doesn't use day bullets in this manner precisely because of the slippage and commission problems you mentioned. Cheers. WW
For traders at professional firms, OTC options are used (created) with "zero" slippage. The cost is usually .025/share plus interest.
Yes, I'm aware of that feature of Pro firms. Any idea how that's actually achieved? How does the put writer control risk, or is it matched up with the LONG somehow, so the writers exposure is protected? I'd love to be able to do this in an account outside a pro firm , without having to buy a conversion and hold till expiry.
If bullets create a hedged position then can a trader simply wait for the stock to drop, or is there risk if the stock goes up? Say a bullet is created for stock ABC at 50. If ABC moves up instead of down, can the trader simply wait for ABC to move back down, or does ABC going up create an immediate loss? I thought being a hedge it's essentially a neutral position. Is the maximum loss for the trader the commission and ticket charge paid to set up the bullet? If so I don't see why a trader couldn't wait for ABC to fall and then execute.
Hapaboy- don't make it more complicated than it really is. If your prop firm or broker offers bullets, you can short a downtick and will pay more per ticket (usually about 2x). You are short the stock. If it goes up, you have risk and just spent too much on commissions. If your broker/prop firm doesn't offer them, setting them up on your own would be excessively complicated and costly, imho. Best regards, -There is always another trade.-
If it is a married put (Long stock and long depp in the money put) Then not only do you not have risk on the upside, you have extra profit potential if the sock goes higher than the strike price before expiration of that married. There is no risk beyond what you paid (except pin risk) other than when you hit a bid and nobody else jumps in the pool and you cover 1/2 point higher. The technical term for that is the curse of having long stock.
Presumably , it would be impossible to put on a married put position at NO COST. You would pay approximatly the same in extra premium for the put ,as you would for the call of the same price. And whats this about paying twice the commission for trading with bullets? Never heard that.
So, if I buy a bullet and the stock goes UP, I should cover immediately to avoid further potential loss? It sounds like there's a minor debate here concerning this....
First, a deep in the money put usually has little or no premium due to the credit in the account and that if the price of the call becomes less than the cost of carrying the stock to expiration then the holder of the long put would exercise out and cover his short call locking in a profit of the difference between what the cost to carry would be less the cost of the call. Of course there are comission costs, but they can be minimal. The decision should be made as to whether or not the timing of the short is such that you need it immediately. Then you pay the commission. If not, get short the natural way. I repeat, you have no risk, in fact potential profit opportunity if you haold a married put while the stock is going up. Any one think otherwise let me know why. A full conversion on the other hand has no upside potential. It is actually a bearish position because if the stock drops enough you exercise out of the put. See above explanation.