DNDN Look at this play!

Discussion in 'Options' started by arizonadreamer, May 9, 2007.

  1. Okay, it looks like a conversion is out of the question since DNDN is nearly impossible to borrow but:

    Stock at 7.40
    May 7.5 call at .5
    May 7.5 put at .8

    covered call = naked put

    1) covered call: 7.40 stock price - .5 May call = 6.9 debit
    2) naked put: 7.50 strike price - .8 May put = 6.7 debit

    Any way to capitalize on this?

  2. You mean the reversal. Conversions are long the natural shares, short synthetic.

    Nothing. You can't lay-off stock against the long synthetic. Look for box or roll opportunities, but the reversal is moot.
  3. Yes, a "reverse conversion."

    Could you provide an example of a "box or roll."

  4. It's a synthetic long[short] at x[y]; i.e., the reversal at 5-strike, conversion at 10-strike. The stock offsets. Obviously there is no need for trading stock at all, but most box-strikes aren't traded concurrently. A roll is a time-box; long[short] the May 5-strike, short[long] the June 10-strike.
  5. Could you provide actual numbers?

    Are we assuming we can borrow the stock?

  6. No stock enters the equation, unless you're holding inventory of conversions pre-box.

    I don't have the quotes at-hand, but this is a long box:

    Short May 5 put, long May 5 call

    Long May 10 put, short May 10 call

    You're long at $5.00 and short at $10.00. Carry is $.03 on $5.00 [strike differential] to June expiration. You'd need to buy the box for < $4.97 to hold a +expectancy, net costs.
  7. Thanks atticus.