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Anyone do conversions anymore?
- Thread starter nravo
- Start date
More chance of finding a needle in a haystack.
Sometimes I put a conversion on the TOS analyze screen for GOOG and watch it jump around. Never actually did the trade though.
Quote from atticus:
Any perceived edge in a conversion is the result of market movement during execution. You're better-off trading direction.
I know this is an old thread but still holds true I expect.
Today while looking at a collar play, I found a conversion. Being new to options, I thought I was missing something since it looked too good to be true. This conversion lasted long enough for me to pick up my McMillan book and look it up an the chapters on arbitrage. It was still there after I determined it was called a conversion but dissappeared shortly after (probably a total time of 10 minutes or so).
Unfortunately, I wasn't paying close enough attention to the volume to determine if it was actually traded away or not.
What exactly does the above quote mean? Is it saying that the inefficiencies of updating prices can cause momentarily conversions to appear? I'm guessing 10 minutes of quotes showing a conversion wouldn't be due to market movement would it? (And no, my quote system wasn't hung).
Why wasn't this trade immediately arbitraged away?
I'm guessing you'd have to be pretty nimble to take advantage of conversion. What would the mechanics of the trade be in order to make sure you obtained the conversion? An "all or nothing trade" of all three positions at or below bid?
Thanks,
Ray
Quote from RainmanRam:
I know this is an old thread but still holds true I expect.
Today while looking at a collar play, I found a conversion. Being new to options, I thought I was missing something since it looked too good to be true. This conversion lasted long enough for me to pick up my McMillan book and look it up an the chapters on arbitrage. It was still there after I determined it was called a conversion but dissappeared shortly after (probably a total time of 10 minutes or so).
Unfortunately, I wasn't paying close enough attention to the volume to determine if it was actually traded away or not.
What exactly does the above quote mean? Is it saying that the inefficiencies of updating prices can cause momentarily conversions to appear? I'm guessing 10 minutes of quotes showing a conversion wouldn't be due to market movement would it? (And no, my quote system wasn't hung).
Why wasn't this trade immediately arbitraged away?
I'm guessing you'd have to be pretty nimble to take advantage of conversion. What would the mechanics of the trade be in order to make sure you obtained the conversion? An "all or nothing trade" of all three positions at or below bid?
Thanks,
Ray
When you say conversion, I believe you really mean a 'reverse conversion' - that's the play where you short stock. If you find a forward conversion (long stock) that's out of line, you can make the attempt to play, but it's not likley to be real. Do not ignore the cost to carry stock.
As already mentioned: You MUST be able to borrow the stock to do reverse conversions. When you cannot, the option prices get out of line and there is nothing you can do about it.
It's available in C and GM for example..
Furthermore, if the opportunity did exist, it would not last 10 minutes, not would it last long enough for you do take advantage. Leave these to the professionals with the high speed computers and try to make money elsewhere.
Mark
This was a long play so shorting wasn't involved.
Can you be more specific how a dividend might come into play for such a short span of time? There weren't any special dividends announced.
Cost of carry? Is that really much of a concern these days for the average investor? I supose it's still looked at by big money. What is it now, about .1%?
The conversion looked like this:
XYZ $9.05
XYZ May 09 9 call bid $0.79
XYZ May 09 9 put ask $0.63
I'm pretty confident I wouldn't have been able to trade it but it's somewhat disturbing to sit there and watch it on my screen. Especially since the profit expanded and contracted a couple of times. If I was a day trader, I'd probably feel sick.
- Ray
Can you be more specific how a dividend might come into play for such a short span of time? There weren't any special dividends announced.
Cost of carry? Is that really much of a concern these days for the average investor? I supose it's still looked at by big money. What is it now, about .1%?
The conversion looked like this:
XYZ $9.05
XYZ May 09 9 call bid $0.79
XYZ May 09 9 put ask $0.63
I'm pretty confident I wouldn't have been able to trade it but it's somewhat disturbing to sit there and watch it on my screen. Especially since the profit expanded and contracted a couple of times. If I was a day trader, I'd probably feel sick.
- Ray