Conversions / Bullets

Discussion in 'Order Execution' started by H2O, May 24, 2002.

  1. H2O



    I'm currently trading with IB.

    I hear a lot of bullets / conversions used by the pro firms give them a huge advantage. Since IB offers low commissions on options, would it be possible to set up your own conversions ?

    Anyone doing this ?

    Reactions ?
  2. I have done it. the issue is the amount of capital you have. Since you pay for the long stock and long put in cash, this cuts down on your cash which is used to determine your 4:1 or 2:1 margin (over or under 25K cash). I bought 500 shares of $30 stock which tied up $15k bought the puts and avoided the uptick rule. Since the calls had a very low delta I didnpt even sell it. 3 weeks later the stock had a huge rally so I sold the calls then and locked in a good profit. Check with IB about their margin rules as to how they will treat long stock long put.
  3. If IB supports the minimum hedged position margin rules, you could get up to 10:1 margin on the position which would sharply reduce the impact on overall available marginable equity.

    For instance, if stock was trading at 50 and you bought the equity and you sold the 50 stike calls @ 3 and bought the 50 strike puts @ 3 to establish the completely neutral collar, the short call premium would wash the long put premium and the margin required on the now hedged long equity would only be 10% of the equity price. Note that to use the fully neutral collar to effectively short the stock without a downtick you'll need to be allowed by your broker to temporarily go naked short on the calls (when you sell the long equity) intraday.

    Only being long puts against the long equity also entitles you to the hedged position minimum margin rules but you'll be paying for the puts outright (no short call premium to offset) and you're technically only incompletely short (based on the delta of the puts) when you sell the long equity.

    If IB doesn't use the mins (and if not, why not), then as previously noted you could tie up a lot of available margin.
  4. H2O


    Thanks for this explanation but I was wondering if any of you actually uses this in trading with a retail broker ?

    I think I get from the website IB allows the lower margin for the option position.
  5. Yes, but once you sell the stock, won't you automatically be kicked into the unhedged margin rates?
  6. I don't think the risk systems of some brokers are real time enough to spot that during the day as long as you cover and get flat at end of day. That is why I don't sell the call coz short options have higher margin rates. This opens me up to possibility of selling a way OTM call later when stock goes up and make better $.
  7. H2O



    Do you use IB for your executions ? Can you give me an example how you set up / follow up your conversions ?

    Thanks in advance,
  8. Gat, not selling the CALL means you bought the Synthetic CALL. Long PUT, Long STOCK.

    Unless you are talking way out of the money puts, you'll be paying at least 40-60 cents/share by not selling the call. If the stock goes lower, you lose that money.

    Not saying its a bad idea, just that you do pay some $$ for not selling the call part of the bullet.
  9. Some of these OTM calls have .10 cent spreads so yes I do take the chance. Ex. of a 5 delta call might be 5 bid offered at 15cents so why would I sell 5 cents? Might as well take a chance and possibly hit a home run. It happened to me twice in 6 months, 10 cent call went to 1.
  10. hi RSprengers. I use one of the introducing brokers of SLK so I use REDI. Using the SP as a short term indicator I buy the put when I think the stock is going lower then buy the stock. I do the put first coz it is harder to put on than stock. If you buy the stock and it prints 5 cents lower, xometimes the market makers adjust right away AND they adjust way too much when they see the quote size favors further donw move so you are really stuck, you'd end up paying 20 cents against you just to stop the bleeding. After I buy the put, I try to buy the stock on the bid.. hopefully SP keeps going down, then I adjust my bid lower,etc. When do I sell the call, depends on the delta of the call the exp date, the way the chart looks. At this point it becomes a market call, either I am right and hit a home run when I sell the call 1-2 weeks later or I eat the 30-80 cent loss being long the synthetic call. Hope this helps.
    #10     May 26, 2002