Low risk 10%-15%/year option strategy

Discussion in 'Options' started by Alpine, Apr 14, 2006.

  1. Alpine


    Which options strategy, in your opinion, is best to generate a moderate return (10-15% annual) with low risk tolerance?
  2. The low risk market alfpha is close to the interest rate on Gov Treasuries, which is now about 5%. If you are looking for an alpha of 15% while low risk, you are dreaming pipes. To find the market inneficiency with even a 15% alpha with low risk, one must command a large leverage and engage in complex financial engineering transactions, i.e. swaps, credit derivatives, etc. Sometimes hedge funds manage to squeeze it out.
  3. Locate hard to short shares and trade the reverse-conversion[reversal]. The arb for the upstairs trader is the premium as a function of the difficulty in locating shares. Virtually riskless if traded in the front months.

    Another slant is on riskarb deals. Often the conversion/reversal market goes on tilt due to the upcoming stock-swap. Large premiums are often be seen prior to the completion of the deal. IMDC earned >$4.00 in a few days on the reverse-conversion. The arb was in play several weeks ago. It was the largest prem I've ever seen on a lock.

    I know ppl who generate >30% returns with nothing but pin and rate-risk. Be sure to price divies, and rho isn't a concern if trading front months.
  4. WallStGolfer31

    WallStGolfer31 Guest

    lol, when you find out, let me know!
  5. Maverick74


    Well, usually you can't get the stock if the reversal is trading at a premium. And it's not risk free because even if you did get a couple of shares, the stock could be called in at any time leaving you long the synthetic naked. Of course this would happen at the worst possible moment. And lastly, I doubt one could garner enough shares to make this a viable strategy year after year to make 30% a year. I see these things sporadically with very few shares available. Even then, I wouldn't touch the reversal for fear of getting the stock called in.
  6. I've been called approx 5% of the time. I have the account vetted and would be glad to show you Mav. There was more IMDC available than I could use. I did the IMDC 100x before it started to converge. So you get called and you liq. Wasn't a problem with IMDC.

    My smallest position was 800 shares in TASR a couple of years ago. I am not stating it's an easy lay-up, but it's a simple matter to quote a list of hard to shorts and calc for parity. Locating stock is another matter.

    BTW Mav, you had a heads-up on IMDC! Dumas! :p
  7. Maverick74



    The IMDC was an acquisition deal no? I'm not referring to those as they carry their own unique risk profile. I'm referring to large put skews in hard to borrow stocks. No way anyone with any decent capital is going to find enough of these to do this consistently as a strategy. Unless you are trading a sub 50k account. Even then, I'm not sure the risk is worth the return. If I remember correctly in your IMDC deal, you simply took the spread off when the reversal converged, you were not CALLED in on the stock.

    Look, I still do the divie plays as do many others, but likewise, no way anyone could make a living off of these full time. There are just not enough of them and not enough profits to make from the few that do work.
  8. IMDC was clean -- the deal wasn't to swap until > a month past expiration. ANY reversal carries risk of stock-calls; as well as assignment risk when the synthetic trades >95 delta. Sure, I am in total agreement that you can get your shares pulled. That is a far greater concern than assignment under one sigma. When all hell breaks lose you need to be vigilant.

    I wouldn't post it here if I thought it was a lay-up. I try not to sh*t on my own lawn. I agree that they're not easy.
  9. I can't make a living off these. That wasn't the OP's request. I find maybe 10 of these a year. This one I had missed; an ET member asked me about IMDC. So I owe Cache and Baron a piece of that one. Dinner and outcall on me.
  10. In plain english... If you have a low risk tolerance, meaning the same risk tolerance as those whom invest in the treasuries market, options aren't for you.

    On the other hand, if you have a moderate risk tolerance, then there are strategies that present the possibility of higher gains. All strategies have a learning curve, and you are likely to lose money for a while before you start making anything.

    A question like the one that you asked is going to be the subject of much debate here. My take on things... any options strategy that you will play has a negative expectancy. That is, the odds are against you making money in the long run. The only way that I was able to find success was to gain skills in directional forcasting and risk management. Assuming that you have those skills I might be able to recommend a couple strategies that would allow for those gains. :)
    #10     Apr 14, 2006