Bullets

Discussion in 'Trading' started by Weasel, Sep 27, 2002.

  1. Weasel

    Weasel

    What are they? If you are shorting a stock at the opening and it's indicated to open lower, I'm told you can use a bullet to avoid the up tick rule on a short. What are the mechanics behind this? What additional cost do you have on a trade like this?:confused:
     
  2. Minime

    Minime

    This has been discussed many times, try a search using "bullets"


    Here is a brokers definition below, but it allows you to sell stock short and avoid the uptick rules. Its identical to having a long and short account at the same firm, and selling your long position without an uptick, and thus becoming net short. This of course is illegal, but when someone came up with something complicated (like bullets), and ran it by the regulators, they tried to act like they understood and let it slide by. This is a big advantage pro firms have over retail firms in NYSE stocks. The NASD uptick rule is more generous and bullets aren't really necessary on liquid NASD stocks (IMO).

    "A "bullet" (a.k.a. Conversion) is a hedging strategy to offset investment risk, consisting of a long stock packaged with a long put and a short call. The options and the stock are bought on the same day and the stock purchased will be delivered when either the put or call is exercised. The put is purchased at a strike price greater than the underlying stock price. The call is written at the same strike price as the put. If the stock price remains less than or equal to the strike price once the strategy is implemented, the call will expire worthless, the put will be exercised, and the long stock will be delivered in order to complete the hedge strategy. If the stock price becomes greater than the strike price once the strategy is implemented, the put will expire worthless, the call will be exercised, and the long stock will be delivered in order to complete the hedge strategy. The option components of a bullet are unregistered, non-exchange traded securities, and there is no secondary market for them. All orders are unsolicited. The position is a day position, and the options are either exercised or expire worthless at the end of the day automatically."
     
  3. Weasel

    Weasel

    So the firm has the long which I'd assume they dump right away? The prop trader is left with the short?
     
  4. This has to be one of the most often asked questions on this site. There must be 10 different threads by now entitled "what are bullets"?

    Hey moderator, how about a FAQ?