Bullets & Conversions

Thanks Robert.

I used the search function - 16 threads about bullets, but only a few references to conversions.

Correct me if I am wrong - but I take it that in a bullet the put is purchased from the bullet firm.

Are the options involved in a conversion purchased from the various options exchanges?

What I am getting at - is the only difference from getting a conversion at a pro firm versus setting it up yourself at a retail firm is that the pro firm recognises the neutral position and therefore does not impose massive margin requirements?

What are the problems that you refer to if the options expire at the strike price?

Originally posted by rtharp

Conversion = long stock plus an short at the money call and long an at the money put -done with floor, usually some slippage, used to be given credits--now cost around .05 and last till options expire-1 to 3 months. Be careful when if you options will expire while stock at strike price--can cause some problems

Robert
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Originally posted by m22au
Thanks Robert.

I used the search function - 16 threads about bullets, but only a few references to conversions.

Correct me if I am wrong - but I take it that in a bullet the put is purchased from the bullet firm.

Are the options involved in a conversion purchased from the various options exchanges?

What I am getting at - is the only difference from getting a conversion at a pro firm versus setting it up yourself at a retail firm is that the pro firm recognises the neutral position and therefore does not impose massive margin requirements?

What are the problems that you refer to if the options expire at the strike price?
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The put is written/purchased from the bullet firm. Where else can you find one day expiration on options?
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Conversions involve the options floor. A few years ago when interest rates were higher the option traders would do anything to get a conversion, including giving it out on a credit. (Ie PAY ME to take it) This is due to them being short the stock and long the options. They collect risk free interest on the short.

Interest rates are down so low they don't fight like they used to
:(. Now it usually cost me .05 plus a small spread to get in. The conversion is traded as one whole unit but a small premium is added on top of our commissions.

The prop firm recognizes the neutral option position and therefore don't require it take up a lot of your margin.


If a conversion expires right near your strike price you can wind up with a position compared to it completely just disappearing.

If a conversion is near your strike and about to expire it is best to unwind it , instead of letting it expire

Robert
 
If a conversion is near your strike and about to expire it is best to unwind it , instead of letting it expire
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This is good advice from Tharp.
Don't learn the hard way, like I did...

I got caught on this a couple of years ago on Time Warner. Had a conversion on TWX during the time of the AOL takeover deal. On expiration day TWX was trading at around $40, give or take .25. My strike was $40.

Surprise, surprise, come Monday morning and I expect to have the stock, puts, and calls flatten out neutral, and I am short 1000 shares of TWX because I got assigned. :eek:

Well, I obviously wasn't the only one who got assigned, and damned if that bast@rd didn't go up about $4.00 in the first 20 minutes of trading because everyone was covering.

So, after taking MUCH HEAT for a new trader (this was only about 2 months after I started trading) I held on for a while and ended up down about a grand. Of course later in the day, it came all the way back down, and even went lower.

Oh well, live and learn. Luckily I am still here!!
 
That was one of the examples I was thinking about. But I know guys who had 10,000 share conversions on. Imagine having that go against you 4 points. :(

Robert
 
In the options world it is known as " pin risk "

Pin Risk
Although most brokerages have rules regarding exercising options at expiration, there is always a degree of uncertainty surrounding this monthly event. This uncertainty causes a special type of risk referred to as "pin risk," which derives its name from the special risks that occur when a stock is "pinned" at the strike at the close of business on expiration Friday. To understand pin risk we must first understand the rules at expiration.

Exercise Rules

Customers and professional market makers generally have different rules regarding the exercise of options at expiration. For most customers, their broker will automatically exercise an option that is 3/4 points or more in-the-money (ITM). Of course a customer may always choose to exercise an option that is less than 3/4 points ITM or even to exercise an out-of-the-money (OTM) option.

On the other hand, a customer may also instruct his or her broker to NOT EXERCISE an option that is more than 3/4 points ITM. Anything can happen, but experience shows that most options that expire more than 3/4 points ITM are exercised, while most options that expire less than 1/4 points ITM are not exercised.

For professional traders the rules are slightly different. They automatically exercise options that are 1/4 point ITM. Like customers, professional traders may choose to exercise an OTM call or to NOT EXERCISE an ITM call. Exercising an OTM call is termed "Exercise By Exception."

For owners of puts and calls, expiration Friday requires a decision regarding exercise. For writers of options, the decision process is a bit different. Holders of short positions must play somewhat of a guessing game regarding whether or not they will be assigned on their short options. All of this creates uncertainty over what the short option customer's position will be on Monday morning. This uncertainty is categorized as a risk because you may end up with an unwanted stock position on the Monday following expiration. This unwanted position would in turn expose you to market risk until you were able to liquidate stock on or after the market open. While the term "pin risk" literally refers to stocks pinned at the strike on expiration, our explanation expands on the topic of assignment and includes the broader, though less common risk of surprise assignments
 
I can not believe how hard some people think about the logistics of bullets. All you need to know is that you can sell a stock at will with one. A true jem.

THere is pretty much zippo on this board about conversions and real life examples of them.

-- Right now MMM is trading @ $125ish. If you look at the 125 put and 125 call for April, if you had some hook up you could probably get into this thing for a credit of .10. Basically who cares what happens to the stock, it does not matter. But in the real world, how are you gonna hold a position for 45 days for a whopping dime.

Are conversions best utilized if you leg in?? Should you be in the money or out of the money-- on which side?? Also for you prop gurus, like bullets-- you do not have to do a thing, just type in a few keystrokes and bam your done. Are conversions done like this for you in this manner and what kind of charge do you incur..... I am assuming that like collars, is there a bias to a conversion position...it could be bullish, neutral or bearish.....

Any comments appreciated......
 
Quote from rtharp:

That was one of the examples I was thinking about. But I know guys who had 10,000 share conversions on. Imagine having that go against you 4 points. :(

Robert
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Robert, my friend....what areyou talking about? How can a full 3 way conversion go against you 4 points?? What am I missing, here? Short call, long put, long stock....no way to lose money, with the possible exception of the stock closing right at the strike price, and not knowing if the calls are being exercised.

I know you know this....I'm just trying to clarify for some of the others.

Don
 
Quote from Don Bright:



Robert, my friend....what areyou talking about? How can a full 3 way conversion go against you 4 points?? What am I missing, here? Short call, long put, long stock....no way to lose money, with the possible exception of the stock closing right at the strike price, and not knowing if the calls are being exercised.

I know you know this....I'm just trying to clarify for some of the others.

Don
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First
notice the date of that post above. Risk of that happening in this market is extremely small.

The Conversion was AOL for the AOL / Time Warner merger. Exipred at the strike and gapped than 4 points in the morning.

When was the last time we saw AOL gap 4 points? I miss those days.
 
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