Bullets & Conversions
- Thread starter Hoyler
- Start date
I was talking with a Hold Brothers rep today about an upgrade to their Graybox software and asked him about the new Hedges tab in the Position window. He said it was to keep track of hedges, which they described as synonymous with bullets. He also said that I don't have to be a prop trader to use hedges. My ears perked up at that one! He said it costs $15 for each part (the long, the puts and the calls) plus $2 for each options contract. There's no minimum number of shares to go long; I just have to buy round lots. Is this a good price? One thing I didn't quite understand was that he said I have to hold the hedge for at least 1 month. Why is this? Do bullets at other firms have a minimum holding period?
He also said they have 2 kinds of hedges: regular and day. The regular ones are as above, but the day ones can only be used by traders with $1 million equity plus guaranteed $200K/yr income. I'm not sure why the day hedges need these restrictions. The rep said the difference between the 2 kinds are that the day ones are faster to setup than the regular ones. I didn't ask, but I suppose the day hedges, as implied by the name, don't have to be held for at least a month. Does anyone have more info about the different kinds of hedges?
He also said they have 2 kinds of hedges: regular and day. The regular ones are as above, but the day ones can only be used by traders with $1 million equity plus guaranteed $200K/yr income. I'm not sure why the day hedges need these restrictions. The rep said the difference between the 2 kinds are that the day ones are faster to setup than the regular ones. I didn't ask, but I suppose the day hedges, as implied by the name, don't have to be held for at least a month. Does anyone have more info about the different kinds of hedges?
ArchAngel said:
I might be remembering it wrong, but I think bullets were popularized in the early 90s by hedge funds and private trading firms (who could get special margin treatment) as a way of trying to beat the uptick rule. As I recall, you start off by putting on an effectively neutral stock and option position like this:
Buy 100,000 JNPR @ 60 3/4
Sell 1000 JNPR May 60 calls @ 7 3/4
Buy 1000 JNPR May 60 puts @ 7
Basically this is a completely neutral initial position (i.e., zero risk/zero reward) and remains neutral regardless of what happens to the stock price. However, without the long stock it becomes a synthetic short. So when you want to "short" the stock, you just sell the long stock position. Since you're not shorting (you're actually selling long), the uptick rule doesn't apply.
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Hmmm lets see
Buy JNPR (that's a long position)
Sell JNPR calls (that's a short position)
Buy JNPR puts (that's another short position)
How is this a "completely neutral position"? they don't cancel out
Since the point of all this jockeying is to get a synthetic short position, why don't you just do that!!
why buy JNPR and then turn around and sell JNPR to allow the synthetic??
anyone?
I might be remembering it wrong, but I think bullets were popularized in the early 90s by hedge funds and private trading firms (who could get special margin treatment) as a way of trying to beat the uptick rule. As I recall, you start off by putting on an effectively neutral stock and option position like this:
Buy 100,000 JNPR @ 60 3/4
Sell 1000 JNPR May 60 calls @ 7 3/4
Buy 1000 JNPR May 60 puts @ 7
Basically this is a completely neutral initial position (i.e., zero risk/zero reward) and remains neutral regardless of what happens to the stock price. However, without the long stock it becomes a synthetic short. So when you want to "short" the stock, you just sell the long stock position. Since you're not shorting (you're actually selling long), the uptick rule doesn't apply.
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Hmmm lets see
Buy JNPR (that's a long position)
Sell JNPR calls (that's a short position)
Buy JNPR puts (that's another short position)
How is this a "completely neutral position"? they don't cancel out
Since the point of all this jockeying is to get a synthetic short position, why don't you just do that!!
why buy JNPR and then turn around and sell JNPR to allow the synthetic??
anyone?
babak - "cancel out" and "neutral" aren't the same thing.
if you look at the setup again it is completely neutral (the net cost of the position is 60 which is the strike on both the calls and the puts - so you will neither make nor lose anything regardless of where the price goes).
The reason for setting it up is that when you want to now "short" the stock, you just sell the stock (which is a sell long and thus is not affected by the uptick rule).
Once you sell the stock, you're synthetically short instantly without worrying about pricing dynamics or the ability or inability to get the synthetic legs setup quickly.
As you repeatedly sell the long equity and then buy it back (presumably lower), you're locking in the accrued profit into the aggregate position because of the way the options hedge the equity.
if you look at the setup again it is completely neutral (the net cost of the position is 60 which is the strike on both the calls and the puts - so you will neither make nor lose anything regardless of where the price goes).
The reason for setting it up is that when you want to now "short" the stock, you just sell the stock (which is a sell long and thus is not affected by the uptick rule).
Once you sell the stock, you're synthetically short instantly without worrying about pricing dynamics or the ability or inability to get the synthetic legs setup quickly.
As you repeatedly sell the long equity and then buy it back (presumably lower), you're locking in the accrued profit into the aggregate position because of the way the options hedge the equity.
Babak
Selling calls isn't getting short. It's unlimited risk on the upside with a small profit
buying puts isn't a short position it's limited risk on the upside with huge potential for the downside.
There is limited risk/reward on both of the above.
But if you sell calls and buy puts than you have a short position.
Option traders know this well. An artifical short for a security is selling an at the money call while buying an at the money put in the same month and usually same/or very near strike price.
The reason for bullets is to get around uptick rule. Owning a neutral position and than selling the long side to become short.
If you tried to set this up while the market was falling you wouldn't be able to be executed.
rtharp
Selling calls isn't getting short. It's unlimited risk on the upside with a small profit
buying puts isn't a short position it's limited risk on the upside with huge potential for the downside.
There is limited risk/reward on both of the above.
But if you sell calls and buy puts than you have a short position.
Option traders know this well. An artifical short for a security is selling an at the money call while buying an at the money put in the same month and usually same/or very near strike price.
The reason for bullets is to get around uptick rule. Owning a neutral position and than selling the long side to become short.
If you tried to set this up while the market was falling you wouldn't be able to be executed.
rtharp
In addition to the previous reply, the position of long stock, short 60 call and long 60 put has exactly zero exposure to the market.
We're long 100,000 shares of stock - stock has delta of 1.00
net position in stock = +100,000 shares
We're short 1000 60 calls with a delta of 0.56 - 1000 * 100 *0.56
net position in calls = - 56,000 shares
We're long 1000 60 puts with a delta of 0.44 - 1000*100*0.44
net position in puts = -44,000 shares
Add 'em up and you have zero exposure. This applies anywhere the stock might move - the deltas of the same strike calls and puts (long call / short put or short call / long put) must sum to +/- 1.00.
Hope this helps
We're long 100,000 shares of stock - stock has delta of 1.00
net position in stock = +100,000 shares
We're short 1000 60 calls with a delta of 0.56 - 1000 * 100 *0.56
net position in calls = - 56,000 shares
We're long 1000 60 puts with a delta of 0.44 - 1000*100*0.44
net position in puts = -44,000 shares
Add 'em up and you have zero exposure. This applies anywhere the stock might move - the deltas of the same strike calls and puts (long call / short put or short call / long put) must sum to +/- 1.00.
Hope this helps
Bullets or "day bullets" are used to create short market positions with no uptick. They are constructed by long stock and long puts, deep enough in the money to approach a delta of -100 per option. Note that calls to my knowledge are not usually sold -- I dont know where or why you guys introduced that incorrect option leg of the bullet. Short calls introduce more costs and a complicated hedging situation given the negative gamma. Day bullets are long stock and long ITM puts. Simple and sweet.
To create the short market position in a downdraft, the long stock is sold (requiring no uptick of course) thus exposing the long puts and their negative delta.
WW
To create the short market position in a downdraft, the long stock is sold (requiring no uptick of course) thus exposing the long puts and their negative delta.
WW
