Bullets & Conversions

Originally posted by hapaboy
So, if I buy a bullet and the stock goes UP, I should cover immediately to avoid further potential loss? It sounds like there's a minor debate here concerning this....
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There shouldn't be a debate. A bullet is an almost delta neutral position. That means if the stock goes up or down it makes no difference to the bullets. I don't lose make/money when I have a bullet by the movement.

I make money though when a stock gets a lot of selling pressure and starts to freefall. I can then quickly get short without the worry of an uptick.

There was also a discussion of 2 commissions which isn't true. There is a commission for a bullet if I execute one than another commission for a trade or trades. If I choose to take advantage of my bullet multiple times during the day as it will last till the end of the day.

Robert Tharp
 
Robert,

How often do you use bullets ? Could you walk us through the process with an example on how to request a bullet and how to cover ?

Thanks !
 
It is incorrect to write that movement does not matter when owning a bullet. It is true that the initial delta is very small, however the position has positive gamma. A bullet, the combination of a long deep in the money put and long stock is synthetically equivalent to an out of the money call. If you owned a bullet and the stock was taken over and went up a large amount, the synthetical call could become profitable.
 
To reiterate, if a trader buys a bullet, and the stock goes UP instead of down, does he/she:

A) Cover immediately to minimize loss (if there is loss - that also seems to be being debated).

B) Not incur loss based on upward movement and therefore WAIT until the stock goes down and the bullet is profitable.

Finally, if the trader does not use the bullet during the day, my understanding is that the firm closes it out. Is the total loss to the trader then the cost paid for the bullet?

Would a trader who uses bullets PLEASE clear this up?

Thanks!
 
Dagve is 100% correct. A bullet is the equivalent of a oong out of the money call. If the stocl was taken over when you had one on, you could profit nicely.

When you sell your long stock off of your married put position, you are not short the stock. You are long the put with a delta equivalent posion of being short the stock. What you have created by selling your stock is an economically efficient way to buy deep in the money puts.

If you do not use the married put after putting it on (usually electronically these days) and the stock doesn't run up by more than 30% or so (unlikely these days) you have no risk or reward other than the commission paid.
 
I always appreciate hearing from you as you are good at clarifying things.

So it sounds like using a bullet can be a money-maker whether the stock goes up or down. Please let me know if this assumption is incorrect.

:)
 
The problem for retail traders is that they can't 'unwind' a deep in the money put without paying a 1/2 point spread to the dealers.

There is no liquidity in these. The only way to not get hosed is to let the option run to expiration, and put your long shares at the strike.

Also, the last time I looked, for most stocks, you will pay at least 1/4 or more over par buying at the offer, and that if you can find a deep put (a problem for many stocks). For 1000 shares, thats at least $250 bucks + commission.

The special deals pro firms give their traders seem to avoid these problems. I'd like to see the same made available to retail traders, but am not holding my breath.
 
Stock777.

Professional traders are required to pay more in exchange fee's. There is a yearly membership fee now to the exchange of $350. A seat to be on the floor trading cost over a million. It is estimated that there are only 20,000 (this is probably at the high side) professional traders. This includes all of the specialists, Nasdaq Market Makers and such. With all of these expenses we need to have a reason for them. Bullets are one of our true advantages as professional traders. The bullet firms can deal with 10,000 traders. To deal with the entire trading population is asking quite a huge amount.


Now a personal story of how bullets work.

Today is 11/27/01. I was trading in our office and the squawk box was on. After a short while this absolutely huge roar came from the pits. Everyone stared at each other -then at the spoos to see what direction they were going. Housing Sales #'s had come out and they weren't good.

I daytrade a bank stock on the NYSE. I had bullets on it already. I had already traded it 5 times before this news came out.

I quickly hit the sell button for the huge bid sitting there. It was a downtick from the last time and sales. I took everything that the buyer had on the bid. The second I was filled the everyone realized what was going on. The stock quickly jumped down $0.30. I had a great day.

Only a trader with a bullet would have been able to take out that bid. It was a downtick and nothing else was around afterwards.

Robert Tharp
 
I guess you could have done the same thing with the QQQ's , SPY, SMH, but you may have had to be faster.


Don't know what the pro fees you pay have to do with getting access to bullets. If the firms that supply these at low rates are in business to make money, I don't think they would turn away fresh meat.

I can put on my own bullets, but not at a moments notice, and not at such small cost.

No fair ;-)
 
Firms that provide married puts to the pros are doing so by taking counterparty risk. They are exposed to the ability of the other side to pay for the trade because they are OTC transactions. That is why, if you are a customer they don't like to do business with you -- unless you have $1 million in the account. I tried to open an account with one firm as a customer and that is what they told me. Makes sense. I wouldn't take the counterparty risk od someone who only has 25k in an account.
 
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