Option Arb

Discussion in 'Options' started by poker, Oct 3, 2006.

  1. poker


    Does option arb really exist can someone actually make money doing things like

    calandar option arb

    strike price arb

    conversion arb

    do these things really exist to screen traders is anybody out there making coin doing these kinds of things or are there other types of option arb out there where people can actually make something?
  2. MTE


    No, a retail trader sitting in front of the screen has no chance of making any arb trades as he/she is disadvantaged by slower speed of execution and the bid ask spread.

    Arbing is the domain of market makers and institutions.
  3. Gustaf


    IB is presenting this webinar this week;

    October 10, 2006 at 4:30 pm EDT
    Synthetic Option Arbitrage
    Sponsored by The IFM

    "Synthetic Option Arbitrage
    Tue., Oct 10, 2006 (4:30 PM - 5:30 PM Eastern Daylight Time/GMT -04:00, New York) During this discussion we will look at how arbitrageurs attempt to exploit pricing anomalies in the marketplace. We will discuss Conversions: buy futures, sell synthetic futures; Reversals: sell futures, buy synthetic futures; and look at Box spread arbitrage trades: debit box and credit box. "

    How come they teach this stuff then if its not applicable in the retail domain?

  4. MTE


    Just because they teach it doesn't mean you can profit from it! Synthetics are the key to successful options trading. You need to understand synthetic relationships, but, once again, it doesn't mean you can make arbitrage profits.

    Occassionally, if, and that's a big "if", you're quick enough and have enough knowledge, maybe, otherwise stay away from trying to arb.

    After all, market makers make a living with this so why in the world would they misprice the options and thus hand out free money to retail traders!? Besides, markets are quoted by machines these days, which by default take into account all pricing relationships.

    Hey, I'm not trying to talk anyone out of this. If you think you can do it then go for it, if you succeed then good for you, if not then don't be surprised!
  5. Gustaf


    Yes agree with you, it may not be profitable just because they teach it. Iam gonna give it a try, just to learn the stuff. If no trade appears then nothing lost in that.
  6. cvds16


    I used to do this and made a nice living at it untill they introduced cancellation costs at IB, so yes it is being used.
  7. Gustaf


    Which strategies did you employ?
  8. cvds16


    well i had an option model real time linke to quotes. I sat on the bid and ask of about 25-30 options in the first two months, sometimes third month. and i had prices lighting up on my spreadsheet if things got out of line. I tried to hit everything I could if my position didn't get too much out of hand. I hedged through dia and ym, most of the time I didnt have much delta (often less then 100). When I got gamma-short too much I tried to be a big bidder in comparison to my asks, sometimes about 10 times as much. I sent about 1000 quotes each day to the exchange so it was quite intense for 6.5 hours.
  9. MTE


    You can't have orders on both sides of the market, unless you are a market maker.

    How did you do it?
  10. cvds16


    not on both sides of the same option at the same time. I mostly had some bid and some asks out in different strikes mostly depending on my position in the individual strike. If I however wanted to buy premium overall my bids used to be much bigger then my asks.
    #10     Oct 4, 2006