costless collars

That's just the magic of the internet.

 

I'll bet you dollars to doughnuts he does not know what a forward price is. You are giving this guy way too much credit.

 

Actually option prices have been expensive all year. Value is not determined by dollar amount.

 

If not by dollar amount, what determines the value of the option?

From what i've observed, it seems that call premiums are way too much cheaper than put premiums. they seem to be on opposite ends of the spectrum, so to speak. and this huge difference in value doesn't help when building a spread trade. The amount of profit is ridiculously small.

 

Options are priced off of expected value, not dollars.

 

Costless collars used to be attainable with higher interest rates, as has been noted.

Even Mav's example is attainable.

If the one year risk free rate were 10% and the 100 stock (no divs) ATM 1 yr. put was 1.00 (not likely), then the 1 yr. ATM call would sell for about 11.00.

The "risk free" (almost) conversion would return about 10 %. The 100/105 collar could be had for a credit.

The credit is due to the investment in the stock and the high interest rate - as reflected in the option pricing.

Most likely, both the put and the call would be more expensive, but the example still holds.

 

TLT:
at closing on Thurs:
Price: 111.08
Jan '15 117 call bid = .87
Jan '15 100 put ask = .87
six up eleven down
On price of stock : max gain = 592, Max Loss = 1,108
Expected dividends = $175.2
http://finance.yahoo.com/q/bc?s=TLT&t=2y&l=off&z=l&q=l&c=

 

I have a real beef with gurus who describe these whatever-you-call-'ems as "options strategies", especially when they suggest doing them w/spot delta. IMHO, that's just taking advantage of equity people, who appear to be somewhat less familiar with the concept of "term structure".

 

if the calls really are cheap compared to the puts then replicate them synthetically.....or you will find they are not really that cheap compared to the puts, and the bid ask spread skew is just enough because of supply and demand to make the trade not worth doing, at this point in time. Just because one theoretical model says one thing does not have to reflect reality and it may differ from another model.

 

Martin, the gurus are not all that familiar with term structure either. LOL. It truly is the blind leading the blind.