Risk in holding conversions/reversals to expiration?

Discussion in 'Options' started by TraDaToR, Feb 16, 2012.

  1. TraDaToR



    I am holding a few conversions/reversals to expiration on some NYMEX futures options.

    I remember reading somewhere on this forum that there was still a risk in holding conversions and reversals, but I don't remember if it was for stocks or futures. What is this risk?

    The positions are not big but I wouldn't like the risk of getting flat manually or even worse, IB closing part of it automatically.

    Thanks a lot.
  2. rmorse

    rmorse Sponsor

    Pin risk, would be one. If you close at strike, you won't know your going to be assigned.
  3. TraDaToR


    Thanks. And it can be bloody in my case.

    But I remember reading about some case were IB policy would liquidate some conversions/reversals even if the risk is really limited. Perhaps I dreamed it.
  4. newwurldmn


    would you want them liquidating for you? You'd probably get the worst possible price.
  5. TraDaToR


    No. that's what I am saying. I don't want them to do anything and just let them expire. But I have read so many horror stories with IB auto liquidation that I would like to know if which case it would be triggered.
  6. If you've got some cash available you will be fine. IB's algos sometimes have trouble in illiquid stuff in which it's not MTM frequently. Say you're in 100 conversions on CL and you're marked to 100.00 on spot. Your put hasn't traded for some time and it's marked at 5.20 with the call at 2.00. That mark could cause some problems if you're sitting at less than $300k over haircut.

    Purely hypothetical as I have never done arbs on comm futures with IB, only on listed OCC stuff.

    My guess is someone in risk-management would take a look and pull it off of auto-liq, but I wouldn't want to rely on that. Perhaps you should give them a heads-up.
  7. TraDaToR


    Thanks Atticus, I thought they were using midpoint values instead of last trades for option auto liquidation or at least for illliquid ones. I will definitely send them a message.
  8. Sorry, I assume they are. I forgot to add that I did one conversion in ZN years ago that had some wild-marks. In shares they use midpoint, so I assume they derive the mark from spot and either one of the call or put.

    Leaving a lot of capital in cash negates the purpose.
  9. J-Law


    I wasn't aware that conversions or reversals were in use anymore. They were a great way to sidestep short selling rules in equities 10 years back just lift the stock leg & u were in business for intraday trades.

    Guess even with all HFT shenanigans that there are still mis-pricing to be captured, even trading off floor...... COOL! :)
  10. Conversions and reversals are in wide-spread use today, as they were back in the "good old days."

    Traders tend to put on positions, calendars, money spreads, all the same old stuff we did back then (we did all that stuff for quarters, even dollars, now days, more like pennies)... regardless, traders use the synthetics to get out of their positions, at pure fair value. Banks and other institutions use them to establish a position that might be otherwise hard to do (naked buying of stock for example). Simple games, simple responses.

    edit: back to topic, yes the risk is have the closing price right at or very near the strike price. I remember having to try to buy enough stock to hopefully have the price move above the strike (don't try that these days, LOL).

    #10     Feb 16, 2012