Is this option an arbitrage?

Discussion in 'Options' started by johnymm, May 24, 2010.

  1. johnymm


    Is this option arbitrage?
    For instance: A broker has the following prices of MSFT june call 30:

    sell: 1, buy 1.5

    Another broker has:
    sell: 1.6, buy 1.7

    So when you buy from the first broker at 1.5 and sell at the second for 1.6...that is 1.6-1.5= 0.1.

    You receive 0.1 in total...but is your position secured until expiration?
    It seems likely that you can receive an early margin call on your short position?

  2. There are too many players that are higher up on the food chain for this to be possible. You have not found an arbitrage, nor will you.

    I suggest that you stick to the paper trader for a while.
  3. hajimow


    Orders don't come to the floor like that. Always the highest bid in the "WORLD" becomes the best bid price and the "WORLD" lowest ask becomes the market ask price. You can not sell at higher price when someone is willing to sell at lower price.
    Conclusion: Making money is more difficult or sophisticated than you described.
  4. johnymm


    No shit "wise guy"...
    There are such opportunities in OTC fx options between brokers.
    Since OTC option brokers price options based on...assumptions. No black-scholes, no graham-cox. And surprisingly (or not...) each model has it's own variables - and mainly: Volatility and Risk-free rate. Though the real problem is not the volatility and the risk free rate - but rather the fact that OTC options aren't shown to everyone as options on MSFT or DJI - hence the obvious opportunity for arbitrage. My only concen is that it will be too less and there is high probabilit for a margin call on the short position - which was what I was asking for for someone to explain...since I am too damn lazy to that simple thing...
  5. johnymm


    Well thanks...but again: my major concern was the short position - not the fact that it's too damn hard and one needs HF trading with "sophisticated c++ programs", " princeton degree". "higher food chain" and stuff. I will try to write it down and then will post here again i guess :cool:
  6. sjfan


    Can't you invoke Novation so that you the two dealers face each other? Also, can't you net the positions in terms of margin? I assume you are looking to trade these under ISDA right?

  7. charts


    You ask stupid questions, then go upset ... How old are you? :)
  8. sjfan


    Also... if these options are bespoke enough that you can't novate, and bespoke enough that you can pick two dealers off - then how in hell are you getting them to quote you a two-way market?

  9. hajimow


    You buy an option for $1.5 and sell it to another broker at $1.6. So you should have no position left. You are neither long nor short after this trade. I trade stocks and options and I have never seen that case that you mentioned. Maybe you know better. Maybe you mean options in different markets like Canada and US.
  10. you are dumb.

    #10     May 24, 2010