Conversions and Reversals

Discussion in 'Index Futures' started by lightrader, Jun 5, 2011.

  1. Hello,

    I would like to understand if trying to do conversion or reversal arbitrages with futures and futures options (and building the position at once through a spread order and not through a few orders that expose you to an execution risk) is a strategy which can be implemented successfully, or is it only a market-maker strategy and a retail investor will generally not succeed in making any profits with such strategy, even if the commissions are very low (say, with IB's or other low cost broker's commissions).

    My question relates mainly to US markets but if such strategy is available in other markets I would be happy to hear about them as well.

    Thanks for your help.
  2. rmorse

    rmorse Sponsor

    If you entered a spread order that would be a profitable trade for you, why would anyone take the other side, and take the loss? Futures are not "hard to borrow" so your rate would be the same as other traders.
  3. I of course don't expect that someone would take the exact opposite spread order at the same time, but if the prices of the futures and the futures options are exactly the prices states in my spread order, isn't it possible that the order will be filled not by a specific party that takes the other side of the spread order as a whole but rather by different parties that would like to buy or sell each of the different legs in the prices that are stated in my spread order (which are also equal to the current market prices)?

    Or such a spread order may be filled only when a specific party takes the other side of the spread order as a whole and not by different parties for each leg as stated above?
  4. 1) You would tend to get filled "easier" on the underlying futures and filled slowly, if at all, on the options legs. You would be tolerating the outright risk while waiting to lock-in a small profit. :(
    2) You're almost better off to scalp the futures instead. :cool:
    3) You would also have to deal with expiration-related risk that can ruin your profitability. :eek:
  5. with 100's of co located htf vipers watching 100k symbols at all times, what form on insanity makes you think any easy arb is going to present itself to some clown sitting at home?
  6. What do you mean by scalp the futures and to what risk am I exposed in such operation? Could you give an example? Thanks.
  7. 1) You need less movement to scalp the futures than you need to get filled on the options legs of the overall trade. The profit you realize will be similar to legging into the trade you originally talked about.
    2) You have outright risk in trading futures if you don't use protective stop orders to limit losses. :cool: