Don's openings and more for 2005

a column on conversions would fulfill one of your promises

 

I'll send in an answer today to the magazine. I don't think that this question is worded appropriately (LOL), but here goes.

-------------------------------------------

OK, I think I’ve explained this before, but it may have a while back. First off, the basics are pretty simple. If you buy stock, say at $53, and sell $50 strike price calls, and buy $50 strike price puts, then you have a conversion. If the stock goes up or down $10 (or any major move), you will not make or lose any money. The price of the calls and puts together will work out to be around $3.00 ($50 strike price, plus the difference between $50 and $53). The call and put together are your “synthetic” short position, and the stock is your long position.

Be aware that this is not a totally “risk free” position. There is a small chance that the stock will close right at the strike price of $50, which may cause a problem. Since you are short the calls, you have no control over the exercising of them, which would pull stock away from you, thus altering your overall position. And, since you don’t know for sure if those calls are being exercised, you don’t know whether you should exercise your puts. So theoretically you cold end up “naked” long or short the stock, which would cause market risk on the Monday after expiration day (3rd Friday of the expiration month).

The reason that some institutions and traders buy conversions is to either take a small mathematical edge from price disparities (pretty rare these days), or to have long stock in their portfolio that they can use to hit bids on downticks, resulting in profits when the stock goes down. If you have a conversion on, and you sell 1,000 shares at $53, and then buy it back at $51 (while keeping your calls and puts intact), you have made $2,000.

When I was on the trading floor, we loved doing the other side of this type of trade, the “reversal” or “reverse conversion” – because we enjoyed making money on the short stock sale portion of the equation. So conversions can be a “win-win” at times.

As always, be sure you understand options very well before getting involved.

All the best!

Don

 

2 fills, 1 small winner, 1 small loser for a whopping +10

Actually pretty pleased with the trades, as they would have gone against me a decent amount had I not bailed when I did.

 

I just noticed that some of my shorts are rejected for examples:
CA, MSO, LYO, LPX, MWD etc. After inquiring , I found out that these stocks are not on the list of "AVAILABLE to BORROW" list of stocks that my firm has. In the past as long as stocks are not on "HARD to BORROW", you order to short will be accepted. Does anybody else have similar experience.

To make matter worse, you can actually call the stock loan dept to locate the stock so that you can place short order. But starting next week, the firm will start charging for locating stocks. This will make it unfeasible to use it for OPG since we dont know for sure that we will get fills and yet the firm will charge you.

How is Bright trading handling this case Don?

Slow OPG today , down 100, struggled to get out.

Thanks

 

I also got the notice regarding short sales. It does say it only affects non-market maker accounts as far as Merrill goes. I guess it depends if your prop firms has market maker account on the sub account level. I have no clue what that means so Don /Echo, Assent guys with any compliance expertise, feel free to chime in.

 

0/1

no fill. woke up late.

 

Yes, the new short regs are a real problem. About 10% of my list is now un-shortable, even very liquid names like TYC and MWD.

I'm with Assent, can traders from other firms please weigh in on this issue to compare.

Thx

 

I trade with Echo and have no problem (so far). Are these specific for Assent or others? Or is this yet another rule for anything?

 

Lescor:

You can go to assentclearing.com and they have a list of stocks on "AVAILABLE TO BORROW". All my stocks that were rejected were not on that list. I guess Hammer automatically reject shorts orders if they were not on that list. I am trying to figure a way to get around this..

 

We have had very few "unable to short" with listed stocks. I can't imagine WMD (weapons of mass destruction, LOL) would be hard to borrow.

Don

Only +$170 today, but 100% profitable every day all year.