Beating the Prime

Quote from Trajan:

I'm not sure what Metooxx is refering to, the conversion, the collar or some sort of front spread. A collar usually implies a 1 to 1 ratio, which would make it the same as a vertical call spread. The third is what my first trading manager told me to do, "buy puts, buy stock, sell calls." Buy otm puts, buy stock, sell otm calls, this would be done in a ratio so that the greeks are flat. Pretty simple. Then trade against the position to keep the greeks flat and for profit.
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See all of the above answers; I think I have just answered all your questions except it is not a vertical and the short option is ITM or ATM.

We don't normally trade against it ...
 
This doesn't work with a portfolio of a couple; I wouldn't try this on less than 20 or 30 capital equal positions with either a 50% long stock and 50% short stock in a trendless market or 66% vs. 34% long or short stock in a trending market.

Very safe consistent gains with a few problem positions to deal with. The problem positions bring down the yield on the portfolio; however it should always outpace the baseline the original question brought up with absolute protection against catastrophic lose ...
 
Quote from EliteThink:

This would have to be a play off of option pricing as there theoretically is no risk and no profit in being long the underlying and short a synthetic at break even on the same issue with strikes at the place of underlying entry.
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That "theoretically" word will get you everytime ...
 
Quote from metooxx:
You want to be assigned; liquidate the long option and move on...
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Does the above mean that the long OTM put's time to expiration is geater than short ATM/ITM call's one?

Thanks,
dis
 
Quote from metooxx:



That "theoretically" word will get you everytime ...
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You better believe it. Looks like my premonition was somewhat correct. Thanks for the details.

In my experience the volatility skew has made the otm puts worth more than the comparable otm calls so in the long stock scenario you must be buying puts further out. I might be mistaken though as I mosly deal with index options. 20 to 30 is congruent with a diversified portfolio by a mutual fund.

I find it interesting your crew of traders thinks these returns are somewhat small and boring.

Good trading.
 
O.K. at this point, after getting back from a Christmas party, I'm pretty inebriated. I think Metooxx is trying to say is that they sell put spreads for theoretical edge or at least trying to. I assume greek flat?
 
MeTooxxx,

Since you are recommending:

1. maintaining a portfolio of 20-30 stocks
2. purchasing underlying, buy OTM puts, selling ATM calls (or reverse -- short underlying, sell ATM puts, buy OTM calls)
3. diversifying so that you are market neutral with the underlying

Would it be safe to say a similar strategy might be to simply short an iron butterfly (short 1 ATM call, short 1 ATM put, long 1 OTM call, long 1 OTM put) on an optionable index?

Advantages:

1. Only 1 position to watch -- potentially less headache and reduced transaction costs
2. Don't have to purchase the underlying (basically, you forego purchasing and selling the underlying of 20-30 stocks to become market neutral, by simply selling the ATM calls/puts and selling the OTM calls/puts)
3. "Instant diversification" (net effect similar to doing original strategy on 30 stocks, but staying mkt neutral)

Disadvantages:
1. Can't capture implied volatility skews that may exist in individual equities


Just a thought...comments?
 
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