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 create exposure 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.
we see them generally used in the week prior to expiry for people to flatten their options positions off. i've never seen people trying to actually create a strategy out of using them, but guess there must be pennies there for pinching, but there certainly cant be much. Probably the same amount as for say a ICE WTI to NYMEX WTI switch. I think it's more of a close-your-position tool rather than an open-a-position tool.
And do you think it can be executed by a spread order that eliminates execution risk or if it can be executed at all it must be made through separate orders that create exposure to execution risk?
The rate of return on conversions and reversals reflect financing. Commissions aren't really a factor as they would be with HFT. You're not going to beat LIBOR even if you trade the 3-way at mid-point. Is this an academic exercise? Do you realize what the trade entails? It's a guaranteed loser if you're lifting offers and hitting bids. That should be enough for you to realize that it's a waste of your time.
C&Rs are the realm of market makers and they have you beat in execution, access to liquidity, and insight into market dynamics. They usually trade for flat from local to local on the floor depending on who has what positions on their books. You're better off putting your energy elsewhere. Trust me.