What am I missing? Need help from option savvy ETs.

Discussion in 'Options' started by Mvic, Jun 12, 2007.

  1. Mvic


    Buy Goog
    Sell July ITM Call strike X
    Buy July OTM PUT strike X

    Net $220 per unit after commission

    Risk is zero right?

    Equity needed about $2675 with 15% PM rules

    $507X100X0.15-Call credit+put debit=PM required?

    I know I am missing something obvious here but am too much of an options idiot to know what it is otherwise you are looking at an 8% monthly return for no risk, yeah right. I suspect that the cost for the margin might be the fly in the ointment. At 8% would probably work out to a little over $300 for the month making the position a losing one.

    Also, has the new PM rule changed things for you options gurus?

    Does PM apply to SSF and stock options further reducing margin needed for this position to about $2500?

    Is the cost of margin the reason why you are usually better off writing a put than putting on a covered call or have I got that wrong too?
  2. It is a collar with the calls and puts moved to their opposites (i.e. call is ITM instead of OTM).

    Compare this position with the same strikes but put the call at the OTM put strike and the Put at the OTM call strike. Should be similar and it is a collar.
  3. asap


    that's a synthetic interest trade. the apparent riskless profit comes from collecting the interest from the sold call. however, the stock purchase will have to pay interest as well therefore the transaction net result is zero less comms and slippage.

    PM allows to trade vol spreads in such a way that one can increase the size as much as 5X as compared with the plain margin agreement. in addition, margin on some singles that offset each other especially when there is index options involved. overall, PM is quite similar or even equivalent to what professional traders get when sign a haircut clearing agreement, as far as options trading is concerned.
  4. Coach, he's assigning X to both variables, so we can assume the call and put share a strike.

    Mvic: it's a conversion. The carry is embedded in the synthetic short, which trades at a premium to spot equal to the risk-free financing of the $strike.

    It's not interest gained from the credit on the short call. Carry on the 510 strike: 510 + call[credit] - put[debit] - spot.
  5. lol did not even read X, just the OTM and ITM lol...

  6. Mvic,
    You will never be able to put on a conversion or reversal for anything but a net loss. You are not correctly figuring interest carrying cost. The PM requirement for this trade is the minimum $3750 but this is your haircut, you still have to pay margin interest on the long stock which will work out to more than the credit you receive so you will, in the end, lose money.
  7. Not true. I've traded dozens of profitable reversals [upstairs] in hard to borrow shares. It's the result of a liquidity arbitrage, but the opportunities are out there.
  8. I did not mean an experienced professional option trader with a firm that gives good interest rates couldn't do it; I was referring to him, an assumed average retail trader with poor interest rates. If he doesn't even know what a conversion is, it is unlikely he is prepared to successfully lobby his clearing firm to assume the risk of overnight forcible buy-ins of hard to borrow stock. In other words, you're right, but Joe Blow retail isn't going to pull that off. How is your new hedge fund going?
  9. Opt, you did mention conversions, not reversals. So you're [half] correct. ;)

    We're at high-water and things are going well, thanks.
  10. nikko309


    Simple rule of thumb: If it looks too good to be true, it usually is.

    And for the lunch crowd: There are no free lunches!

    #10     Jun 12, 2007