Risk-free arbitrage - not!

Discussion in 'Options' started by dmo, May 28, 2008.

  1. dmo


    Lessons learned moving from options on futures to options on stock:

    A few days ago I noticed that you could do a reversal - a risk-free arbitrage - on USO. You could hit the bid on the ATM puts, hit the bid on the stock, and lift the offer on the calls for a very nice locked-in profit.

    I couldn't believe it. I went over it and over it. It seemed impossible, but there it was.

    This morning when I tried to execute it, I found the problem. You can't short the stock! Impossible to borrow.

    In futures of course, for every long there's a short. So there's no such thing as "can't short the underlying." One more thing to get used to.
  2. The other thing to get used to is the fact that a risk-free arbitrage is not just going to sit there all day for you as the market makers give away money.

    I think anytime you see a risk-free arb as a retail trader you know you missed a step or did something wrong.
  3. Bob111


  4. Hard to borrow reversals are everywhere. The last sizable arb I've seen was in TASR wtih the stock in the 90s and risk-free rates at 5%. That was a 4-handle arb in the front month.

    They're driven by the lack of short-inventory. The puts are in demand with little to no capacity to arbitrage.
  5. Thats the best advice you can get as a retail trader concerning risk free arbs.