Another easy money strategy

Quote from Don87109:
A couple of messages back you calculated the carry cost at 4.1%
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Actually it wasn’t me, but I agree the $ value.

Quote from Don87109:
If the options were mis-priced wouldn't your carry cost calculation be out of whack?
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Not necessarily. You’d still derive a forward value, and a cost of carry value.

Quote from Don87109:
I don't understand how you can agree that the options are mis-priced.
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Put-Call Parity. Where the natural must equal the synthetic, else you’d have an arb.

In this case the natural Put is priced at $ 10.80
The synthetic is priced at (15.10 – [76.30-75.00]) $ 13.80
They should be priced the same, but they aren’t. There is a $ 3 arb to be had by buying the natural and selling the synthetic Put (reversal).

This wasn’t spotted until a disagreement over break-even points.
 
Quote from Profitaker:

Actually it wasn’t me, but I agree the $ value.

Not necessarily. You’d still derive a forward value, and a cost of carry value.

Put-Call Parity. Where the natural must equal the synthetic, else you’d have an arb.

In this case the natural Put is priced at $ 10.80
The synthetic is priced at (15.10 – [76.30-75.00]) $ 13.80
They should be priced the same, but they aren’t. There is a $ 3 arb to be had by buying the natural and selling the synthetic Put (reversal).

This wasn’t spotted until a disagreement over break-even points.
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Sorry, you are right it was not you who calculated the cost of carry.

Anyway, I don't see how the $3 arb is real because the cost to carry the stock is $3.

BTW. I think that your synthetic calculation omitted the cost of carry.

Don
 
Quote from Don87109:

Sorry, you are right it was not you who calculated the cost of carry.

Anyway, I don't see how the $3 arb is real because the cost to carry the stock is $3.

BTW. I think that your synthetic calculation omitted the cost of carry.

Don
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Forget cost of carry in the synthetic, it doesn’t feature here. The $ 3 arb is locked by buying the natural Put.

You buy the stock for $ 76.30, you sell the Call for $ 15.10. That’s the synthetic short Put done for 15.10 - (76.30-75.00) $ 13.80.

You then buy the natural Put for $ 10.80.

You now have a $ 3 credit and you are both long and short the $ 75 Puts. No matter what happens to the stock, at expiry your position will Net for Zero.

Try graphing it, you’ll see it then.
 
Quote from Profitaker:

Forget cost of carry in the synthetic, it doesn’t feature here. The $ 3 arb is locked by buying the natural Put.

You buy the stock for $ 76.30, you sell the Call for $ 15.10. That’s the synthetic short Put done for 15.10 - (76.30-75.00) $ 13.80.

You then buy the natural Put for $ 10.80.

You now have a $ 3 credit and you are both long and short the $ 75 Puts. No matter what happens to the stock, at expiry your position will Net for Zero.

Try graphing it, you’ll see it then.
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You are ignoring the fact that the money you paid to buy the stock could be earning $3 in a risk free investment. That is the "cost to carry" which must be included in your analysis. When included you can see that the options are not mispriced.

You could make the same $3 in a CD why bother setting up this position?

Don
 
Quote from Don87109:

You are ignoring the fact that the money you paid to buy the stock could be earning $3 in a risk free investment.
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Cashflows;

Buy stock - 76.30
Sell Call + 15.10
Buy Put -10.80

Net - $ 71.30

I see your point Don.
 
The options may very well be mispriced, even with the carry embedded in the call/put seemingly correct. The implied forward is correct within a few bp, but the call value may be overpriced equal to the put underpricing. We'll see tomorrow what the natural and synthetic will price the b/e in relation to the natural straddle and long stock position, but the expiration b/e must equal the natural and synth 75 put's ThVal[b/a midpoint].

Best practice is to compute the implied forward rate by the conversion-arbitrage. The call premium is the revenue-side of the conversion. The implied forward rate is embedded as a premium in the call or a discount on the put -- long stock/short call/long put.
 
Quote from riskarb:

The options may very well be mispriced, even with the carry embedded in the call/put seemingly correct. The implied forward is correct within a few bp, but the call value may be overpriced equal to the put underpricing. We'll see tomorrow what the natural and synthetic will price the b/e in relation to the natural straddle and long stock position, but the expiration b/e must equal the natural and synth 75 put's ThVal[b/a midpoint].

Best practice is to compute the implied forward rate by the conversion-arbitrage. The call premium is the revenue-side of the conversion. The implied forward rate is embedded as a premium in the call or a discount on the put -- long stock/short call/long put.
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hmmm , check this out , R/A...
AAPL 07 calls at 43.4 and put at 42.2 (vols) and it's happens before EVERY report ( last three qtrs) , but after report gap is disappear...
AAPL reports on 1/18
btw , same with goog ( and similar 470 position has 4.5% arb)
Any connection here in your opinion ?
 
Quote from IV_Trader:

hmmm , check this out , R/A...
AAPL 07 calls at 43.4 and put at 42.2 (vols) and it's happens before EVERY report ( last three qtrs) , but after report gap is disappear...
AAPL reports on 1/18
btw , same with goog ( and similar 470 position has 4.5% arb)
Any connection here in your opinion ?
More...

Same strikes? Or are you referring to split strikes? What model are you using?

I suppose the bid/ask vols could imply that 2.8% variance. You need to use the midpoint of b/a when quoting the strike-vols.

I've witnessed 30d risk reversals that expressed a skew favoring puts by as much as 3000bp. The -20d put vols were trading 30points over the the 20d calls due to collar sales and straight put buying as portfolio protection. Back in the late 90s it was easy to pick-off skews as large as 40 points, calls/puts, in stocks such as QCOM, YHOO, JDSU and SDLI before the merger. You could print money by simply sellng calls and trading neutral with long shares or ITM calls, which had deep -skew due to synthetic put dominance.
 
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