Not ready to start a journal yet, but just wanted to state that true risk-free options arbitrage still works in 2019. It's rare and not a big income generator, but possibly done all day long by some market makers, and probably little differently. I wrote my own arbitrage bot and in my case it's second time it worked the day after AMZN earnings, buying variety of multi-leg combos at market open. Ten seconds after market opens it no longer works. Occasionally this worked on a few other stocks during the day, and once at market close, though market makers quickly plug such leaks. I'm basically placing hundreds of orders as the market opens for various multi-leg option combos, seeking to arbitrage between stale orders sitting at exchanges and possibly overnight orders from people trying to get out of losing positions. Basically ending up buying at credit some combos that must have positive value, then selling them the same day at profit regardless of stock price. At the same time I suspect that I catch market makers themselves in cross-fire, or arbitraging between multiple market makers in the chaos of market opening. And I don't believe this can work with any other broker than Interactive Brokers, so they really are irreplaceable in some aspects. I also don't believe that anyone using Greeks would be able to do this, as they're so focused on options Greeks they don't see stuff where Greeks are detrimental and obstruct the picture. (I suspect I see more stuff thanks to being free of Greeks, which I may post in the future) (the last position above is a regular long-term bet that is currently losing) Here is another AMZN batch from October 26, 2018
Dude, why??? Why would you post this on ET? I mean, the entire internet is reading this and probably also some peons who work for Options MM's. How long do you think an edge like this will exist? The fact that you can arb stale quotes with TWS means that someone at Optiver et al gets fired because he or she doesn't understand the job. Holy crap, in 2019 arbing with TWS is like arbing with homing pigeons anno 1812. Dude, don't be an idiot. Delete this post and enjoy the couple of grand you'll be making with this. P.S.: You're not the only one who understands no arbitrage options skews
The reason I posted this is because I had much bigger edge in the past and it is evaporating, so MMs are already catching on and plugging their leaks. In the past I even wanted to know who they are I was literally stealing their money. Now this is no longer a viable source of income, just an occasional stuff to have fun with while taking too much of my time, so I'm refocusing on other stuff and letting this one go. But you may be right, I'll think about this and may delete today
BTW, I think it is Ernest Chan that wrote in some book or a blog that he is posting his own strategies that are no longer viable for him. I'm not even posting full details. And sure, 'guru' is just a handle. The only thing I know as a 'guru' is that learning is a life-long process.
Many brokers that I tested wouldn’t even let me place those orders, showing them as invalid due to the way they calculate combo price or value, kinda like telling you that you can’t get a debit spread at credit. Only IB will let you do this. Exchanges also have some checks so I have to assemble more complex orders and adjust them later. [edit/add] IB's SMART router is also pretty good at sending stuff directly to exchanges, while many brokers supposedly send your orders to MMs who wouldn't let you do anything they don't like.
Even if he posts it here the vast majority of people who see this will not have the technical capacity to implement this. What as mine as well have said “huge money to be made in the NBA, only those 7’0” and taller need apply.” 10/10 would read again though. This is some of the most worthwhile content I’ve seen on ET in some time. Nice work!
Could you expand on why you think being free of the Greeks is an edge here? I know you said the size is small but just having and edge doesn’t get you off the hook for managing risk, right? To be clear, I do understand that what you’re doing is entirely a function of intrinsic so for the purposes of selecting trades you can forget all the silly symbols, I don’t think omitting them fully from your risk management strategy is especially prudient. That being said, when I played the arbitrage game in an interview at an OMM I got the trade right, but there was 500 on the bid and being the idiot I am I said “I’ll do 300.” This trader supervising basically stopped the game to explain to me that if you have an arb you get as much of it as you can. Needless to say I was not offered a job...
Smart trade.You probably only catch these dislocations when the open is very volatile and your orders go unfilled most of the time. It does not really scale so most of your alpha decay will come from MMs gradually improving their opening process, not trying to fix this issue specifically.