Bright on Bullets

Andre · Jun 9, 2003

One of the subjects we've heard people discuss here on Elite Trader is Bullets ie: How do they work? There's been alot of misinformation posted. So, we're having Don Bright on this week to help clear it up. He'll be covering:

* Defining "bullets" and "conversions"
* How to access both
* How to put either to use when tape reading
* When to buy a conversion vs. a bullet
* Estimated costs of each
*** Important facts about the use of bullets!

Please join us Wed., June 11th at 4:30pm EST in the Elite Trader Chat Room.

AndrÃ©

RichSohn · Jun 9, 2003

a bullet is a small metal projectile which is used to puncture the skin of a specialist so that you may once again enjoy the just nature of life.

Quote from Andre:

One of the subjects we've heard people discuss here on Elite Trader is Bullets ie: How do they work? There's been alot of misinformation posted. So, we're having Don Bright on this week to help clear it up. He'll be covering:

* Defining "bullets" and "conversions"
* How to access both
* How to put either to use when tape reading
* When to buy a conversion vs. a bullet
* Estimated costs of each
*** Important facts about the use of bullets!

Please join us Wed., June 11th at 4:30pm EST in the Elite Trader Chat Room.

AndrÃ©

howellpar · Jun 9, 2003

I'm with Rickie on this one. Much more gratifying than a simple trading method and tool as described by Don!!

Do we get to pick which one(s)? - IBM, C, GE, any at AMEX!!

Ron In-a-sauna · Jun 9, 2003

i heard Don buys you any bullet of choice for the next day, 1000s, if you show up for the chat.

hapaboy · Jun 10, 2003

Quote from RichSohn:

a bullet is a small metal projectile which is used to puncture the skin of a specialist so that you may once again enjoy the just nature of life.

Hey, where the heck were you when the Capital Punishment thread was active?!?

Andre · Jun 11, 2003

We'll be getting started here in a few, folks.

AndrÃ©

MYDemaray · Jun 12, 2003

Don,

How much do conversions cost and how long can you hold them for? I mean, could you put a conversion on for several months? Also, when you guys initiate a conversion, are you buying the options at ask, and selling at the bid, or does your relationship with SLK help you sell at ask, and buy at bid?

One last question, does the conversion cost the same no matter how long you plan on holding it?

Thanks,

MYD

C Robinson · Jun 12, 2003

did you read the log from the chat? i think it answers at least part of your question(s).

http://www.elitetrader.com/ch/transcripts/bullets_chat.cfm

MYDemaray · Jun 12, 2003

c_robinson,

itrdbonds (Jun 11, 2003 5:40:12 PM)
Is there a better price on conversions if I go out 6 months vs 3 months (on a per month cost), or is the cost difference so little (per month) that it is not an issue? Also, what would you say is a good time frame for an "average" conversion, 3 months 9 months, 1 month?

Don Bright (Jun 11, 2003 5:41:37 PM)
OK, good point....since the transaction costs are the same, it makes sense to have a longer term conversion.....the "cost of carry" is daily (monthly)...but the "in/out" costs are a one time thing....

I guess my question is relating specifically to the bid/ask spread. While carry cost does determine option cost, how does bid/ask spread affect conversion cost. In other words, as bid/ask spreads widen with lengthening expirations -- do conversion costs change? Or, are conversions priced at a flat rate across the board? The increased cost to a retail trader is quite evident if you try to assemble your own conversion with, let's say LEAPS it will be much different that assembling a conversion with 1 month until expiration --- Due solely to wider bid/ask spreads in the far months.

This leads to another question, do Bright's (or ECHO's) clearing relationships allow them to transact conversions at the favorables sides of bid and ask?

Thanks!

C Robinson · Jun 12, 2003

hmmmmm.......this may or may not answer your question but the "carry cost" is the interest on the long stock position. you would also get the dividend if you own the stock at the right time. as far as the bid ask spread is concerned, i don't think this would matter. at either echo or bright there will be someone to implement the conversion for you. i have not actually called the floor for a conversion for 4 years.

your account balance after you "own" the conversion will fluctuate depending on the options and where they close in the afternoons but if held till expiration it is as don says a neutral position therefore you will not realize any market risk except on expiration day if the stock closes near the strike price. (but we watch them like a hawk that day)

i hope this helps but if not i'm sure Don would not mind a pm in order to clear things up.

Good Luck!!!