No, can you arb those 10-delta SPX puts that are trading at 25 vola when the 10-delta calls trading at 14 vola? If the skew was "arb-able" the surface would be flat. The frequency or repetitive nature of the process has no impact. Stuff is often traded flat with one order hitting the tape.
i speculate your right and i'm wrong.. the answer to your question is probably not by the way your phrasing it.. but generally speaking i was just trying to say that.. if you wanted to keep from paying high premium when buying a protective put on your stock.. you could sell a call to cover some of the cost of the put... if vola rises in anticipation of a jump/event.. and you were worried..you'd be pay alot for that put.. earnings are a good example... puts and calls go through the roof sometimes.. and you could buy a very expensive put by itself and see it get wiped out with a non event, or you could sell a call and cover some of the cost.. obviously i can't argue with you.. i've been doing this for a very short time. the whole idea was to reduce vola exposure.
I don't want to lead people to believe that the surface is more a smile than a smirk. Long spot, long an x-put and short the y-call is a synthetic long vertical. So yes, a narrow-vertical is not going to exhibit huge vol edge, but there is nothing constraining it.
i wish i understood you better... a collar is a short risk reversal against long stock.. if they "as they do" have a 2 point vola differential then it would cost more to buy the put then you take as a credit selling the call.. as it does actually in real life.. theres no arbing a risk reversal with anything but a short risk reversal at the same strikes in a box.. "i'm just talking" with all that.. i'll have to think about what your talking about in how a flat surface makes the skew "arb able"
i was thinking that a call debit spread does have the same profit graph earlier.. i get what your saying.. theoretically a call debit spread could continually get more and more expensive.. just as the spread widens on the debit you pay to enter into the short risk reversal against long stock..
one thing i've never really been able to figure out why smirk lays down as you go out in time.. but if you look at multiple surfaces in a term structure.. you will see the smirk getting sharper and sharper.. "more happy" going from back month toward front month. but my thinking has only brought me to the point where ive thought that there is no real difference between the smirks as you go out into the term structure if it was normalized via root time.. "this is just speculation" idk know but it seems to me unles there was a rho adjustment out in time.. or some vol event like earnings .. "like the calenders we traded in aapl pre/intra expiration" then the term structure would exhibit similiar smirks out in time otherwise.. i've never really understood why the smirk looks like it lays down as you go out in time.. thats the only way it makes sense.. are they all similar if adjusted to the root of time?
The reason is probably because Cisco is paying a dividend. So your long stock will get a dividend that a long call will not. This cash payment is reflected in a lower priced call making you indifferent to the two positions. I haven't checked if Cisco is paying a dividend.
i've heard collars called fences in alot of books.. i've read a little about dividend arb.. but it makes no sense.. i would think unless there is a dividend change.. why would there be any opportunity.. the dividend would be priced into the call and put from the start... just as jumps at earnings are..
The shares drop on the payment date. The synthetic long will reflect the dividend as a discount to the implied forward on spot (or spot with STIR at 50bp). Nobody is stating there is (necessarily) an opportunity. It's likely a dividend if the reversal looks fat. Dividend arb relates to suboptimal exercise, not whether the synthetic is adequately discounted.
Thank you all for your replies. To answer some of the questions here. In my current strategy I only trade stocks with a 2:1 leverage, and don't have any intentions of increasing leverage until my strategy is proven profitable. I don't really look at leverage as an advantage, or disadvantage for that matter, it just doesn't fit into my strategy yet. To be honest with you all, I don't plan on getting too deeply into the different strategies of options trading anytime soon, as I don't know nearly enough on it yet. If dividends play a role in the pricing of calls I can see why it "looks" cheaper than it really is. That explains some of the questions I had. I could add that my strategy hold stocks on average about 5-6 days. This is mostly data from backtests, with a couple of months paper and real trading. As of now it seems to be pretty accurate. My idea was that if I find out the average loss per trade, on a high confidence level, I could hedge those trades with a protective option (when that is cheaper). That way I'd improve my profit/loss ratio. Even better, since I already have accounted for maximum loss on that option, I could exit my stocks as usual and just hold the option and see if I can make some of the losses back, a win-win situation. Hope I answered the questions that were directed at me. Thanks again for all your replies, its been very helpful!