GM reverse conversion

Discussion in 'Options' started by lescor, May 4, 2005.

  1. Reardon Metal refered to this trade in another thread

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=46659&perpage=40&pagenumber=1

    I am not an options trader by any means but would like some comments on this trade please.

    I sold GM common at 32.35
    shorted May 32.50 puts at 1.65
    long May 32.50 calls at .65
    the common stock pays a .50 dividend with an ex date before expiration.

    Is this not a sure 35 cent profit minus carrying costs and commissions? And since I earn interest on the cash from the short, the carrying costs are actually a credit.

    Per 1000 shares I would take $33,350 into my account with a sure profit of $350 within 2 1/2 weeks. Isn't that roughly a 25% annualized return?

    Am I missing something here?
     
  2. GM goes on and off the SHO list. The strong possibility of the short being called in should be considered. For expirations beyond the tender date, the impact of the tender offer associated with your short position should also be considered.

    Reversals are very common during partial tender offer periods. They are seldom worth the risk.
     
  3. Yes the risk of the common being called is definitely present. If called you could just exit the synthetic long and get flat. Or why not short the single stock future contract?

    I can't find any reference to a date in the tender offer news, but how would this be relevent anyway?

    If you trade prop and have all the cash at your disposal you want, why wouldn't you put this trade on for a million bucks and make a guaranteed 10 grand? It costs nothing to hold the position.
     
  4. Choad

    Choad

    Looks like the IV of the put is twice the IV of the call. I don't remember seeing that before on close month, same strike ops.

    This makes put-call parity way out of whack. That put should be about 0.80. I must be missing something. No such thing as free lunch - at least for retail traders...
     
  5. someone posted a buy in scenario 2-3weeks ago and it looked kinda ugly. The way it was described was that your shorts got yanked out from under you and you'd be basically long synthetic naked maybe after reg trading hours. The spread alone after hours would probably eat up the 35 cents "guaranteed" profit. I am sure it has been done before with success so good luck. I gave up on option sucker bets like these since the mm's at Bear Hunter,Goldman,etc probably know something I don't sitting here alone at my screen.
     
  6. GM has been hard to borrow for about 5 weeks. Combination of preffered offerings, hedging credit derivs, stock in down trend, and now a partial tender. Reverse conversion is trading where it should be, out of whack. Also, 7.5 and 10 strike puts out in Jan 2007 been trading like water. Delta hedges against these with stock down $15 over the last quarter.
     
  7. GATrader (or anyone),

    Help me out here if you would -- I am just a beginner. A long synthetic naked is what?

    Seems to me that after getting the shares put to you -- from the put that was sold aren't you

    Long Stock from $32.50
    Short Stock from $32.35
    Long $32.50 Call from .60

    Arguably this reduces to a simple long call position right? The stock positions net out.

    So, there is a loss of $.15 on the stock which is offset by the $ 1.65 premium taken in. So, the net position before accounting for the call is +$1.50 less the $.60 for the call leaves you $+.90 before the dividend cost. However, there is no dividend cost now as you are flat on stock...So, you end up +.90 overall.

    Do I have that right. It seems better than the "risk free" outcome if my math is right.... So where did I go wrong? :)

    Thanks

    Sam
     
  8. Long synthetic = long call/short put

    In this case Long 32.50 call short 32.50 put. 1.65-.65 = 32.50 - 1.00.

    So you are "long" gm stock 31.50. You will not be flat stock until your put is assigned on ex-div, when you must cough up .50.

    The .35 "free lunch" is only if

    a) your clearing firm does not buy you in.
    b) partial tender by Tracinda doesn't happen.
     
  9. Ah...brain fart. We were talking about the shares being called away and not the put assigned...

    One last question, if the shares are called away before the stock goes ex-div then you don't owe the $.50 right?

    Thanks...
     
  10. theoretically yes. hopefully the clearing firm does its job.
     
    #10     May 4, 2005