Question: Are Conversions/Reversals a viable strategy?

Discussion in 'Options' started by TradingDemystified, Aug 6, 2018.

  1. Hello,

    We all know that the options market is usually correctly priced so that no arbitrage (especially by retail traders) will be possible especially in the long run. I came across this situation however and I haven't been able to figure out what is going on. If I initiate a Conversion here (long underlying, short call, long put) it appears that I would be able to ride it out for a riskless profit (which I just know doesn't exist) so I am requesting your help in identifying what is going on with this setup. For all my calculations I am using natural prices (buying at the ask, selling at the bid) so that there's a higher probability of a potential fill.

    Underlying: GLD
    Underlying Price: 114.33
    No dividend
    Expiration: 21-Sep-2018 (46 DTE)
    Strike: 112
    Call Price (Bid): 3.25
    Put Price (Ask): 0.62

    Conversion would be entered at:
    Long Stock: +114.33
    Short Call: -3.25
    Long Put: +0.62
    ----------------------------
    I would be paying 111.70
    For a structure that would be worth 112 at expiration

    What am I doing wrong here?

    upload_2018-8-6_19-14-1.png

    Thanks in advance
     
  2. Robert Morse

    Robert Morse Sponsor

    Assuming before 4pm ET you can buy the GLD for 114.33, nothing I can see. I assume the stock was not offered there and was higher, but hard to tell.
     
  3. Fair enough, I just got home so I did it after hours but I have been monitoring the whole week and it's something similar... for that configuration the difference is constant between $0.30 and $0.35 per contract. I will post live numbers during business hours tomorrow but I can assure you they look similar
     
  4. Robert Morse

    Robert Morse Sponsor

    The strike is 112
    46 days/360 = .127778 of a year
    Cost of carry at 3% is 112*.12778*.03= $0.429333
    at 2% it is $0.286222

    Seem inline to me. You make $0.30 but miss out on interest at the riskless rate. If I plug in 2.4%, the t-bill rate, that is now= $0.343467
     
    ironchef likes this.
  5. dozu888

    dozu888

    nothing works... stop looking.
     
  6. ajacobson

    ajacobson

    You are also financing early exercise risk. That's part of the excess return - you may not care if it's a pure interest rate play
     
  7. sle

    sle

    Indeed. If gold starts paying dividends, he'll be in trouble! :D

    PS. actually, these ETFs do pay rebates sometimes so it's a real risk
     
  8. ajacobson

    ajacobson

    "PS. actually, these ETFs do pay rebates sometimes so it's a real risk"

    You just broke the WS guy code.
     
  9. mskl

    mskl

    A special thanks for helping me build and maintain my moat. Keep up the great work!
     
  10. elt894

    elt894

    He's going long stock/short synthetic. He'd benefit if there was a surprise dividend.

    Even if it gets called away he benefits because he's being payed $0.30 to finance the position for 46 days but ends up only having to finance it for a fraction of that period.
     
    #10     Aug 7, 2018