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Bullets
- Thread starter sK
- Start date
I saw this in one of my daytrading books once, but I have so many I couldn't remember which one.
I believe it works like this: Let's say a trade is made at 15, and then the next trade is made at 14 7/8, that's a minus tick. If the next trade is also made at 14 7/8, I believe that's considered a zero-minus tick, since it was equal to the previous tick but lower than the one before.
Someone feel free to correct me if you know better.
I believe it works like this: Let's say a trade is made at 15, and then the next trade is made at 14 7/8, that's a minus tick. If the next trade is also made at 14 7/8, I believe that's considered a zero-minus tick, since it was equal to the previous tick but lower than the one before.
Someone feel free to correct me if you know better.
The uptick rules are different for NYSE stocks as they are with Nasdaq stocks. However, if you have a bullet you can essentially go short without an uptick since your short is basically synthetic and you are basically selling the stock you own already that you bought to create the bullet.
Some people call them bullets and some traders call them conversions... but basically they are synthetic shorts.. and here is how they work:
You buy 100 shares of a stock and you also buy a put on the same stock. Now basically, you are flat because if the stock decreases in value the put you own increases proportionately, and of course if the stock increases in value your put decreases proportionately. This is basically called a synthetic short. Now, because the premium on the put is so high, most traders usually write covered calls on the stock (since they do own it), which helps to offset the cost of the put. Now basically, you have bought a put and sold a call on the same stock that you own. So essentially, if you sell your shares of the stock, you are, for all intents and purposes, short; but since you're not actually shorting the stock when you sell it (rather, you are just "effectively" short), you don't have to worry about violating the uptick rule.
If you trade the same stock every day, its worth its weight in gold. But remember, there are costs involved in setting this up (the put still costs you money even though you've offset the cost a little bit with the covered call, and of course, you usually have to pay interest on the underlying stock which you have to own until you're bullet/conversion expires).
I hope that helps. Let me know if you have any more questions...
You buy 100 shares of a stock and you also buy a put on the same stock. Now basically, you are flat because if the stock decreases in value the put you own increases proportionately, and of course if the stock increases in value your put decreases proportionately. This is basically called a synthetic short. Now, because the premium on the put is so high, most traders usually write covered calls on the stock (since they do own it), which helps to offset the cost of the put. Now basically, you have bought a put and sold a call on the same stock that you own. So essentially, if you sell your shares of the stock, you are, for all intents and purposes, short; but since you're not actually shorting the stock when you sell it (rather, you are just "effectively" short), you don't have to worry about violating the uptick rule.
If you trade the same stock every day, its worth its weight in gold. But remember, there are costs involved in setting this up (the put still costs you money even though you've offset the cost a little bit with the covered call, and of course, you usually have to pay interest on the underlying stock which you have to own until you're bullet/conversion expires).
I hope that helps. Let me know if you have any more questions...
That doesn't seem all that worthwhile since you have to both wait for expiration (you can't sell your stock because then you'd be left with a naked short call) and pay the premium over intrinsic for the put (somewhat offset by the call) and usually lose the spread twice (once on buying the put and again on selling the calls).
How would you use this everyday for any proportionate benefit?
Assuming the strike on the put and call are the same, this is only profitable if:
strike is greater than (stock price + put premium - call premium)
And even then it needs to be sufficiently profitable to be worth tieing up the capital until near expiration so you can unwind it.
BTW, being long the stock and long a put isn't a synthetic short - it's a synthetic long call.
How would you use this everyday for any proportionate benefit?
Assuming the strike on the put and call are the same, this is only profitable if:
strike is greater than (stock price + put premium - call premium)
And even then it needs to be sufficiently profitable to be worth tieing up the capital until near expiration so you can unwind it.
BTW, being long the stock and long a put isn't a synthetic short - it's a synthetic long call.
AA,
Like I said it is generally used by traders who trade that particular issue a lot. Typically, a connversion/bullet will cost you a couple hundred dollars a month and you have it usually for 3 or 4 months (till expiration). And you're right, when you sell the stock, you are naked, which is why you are "effectively short".
One great example of this is over at Bright Trading. They actually have a person in their back office who specializes in creating conversions and bullets for their traders. Sometimes, it takes a few days before they can actaully get it in place, because as you pointed out, they have to wait for the spreads to be just right. But I would say that at least 2/3 of all the traders they have carry 2 or 3 conversions at all times. Its an essential tool to have if you are a daytrader because it allows you to short a stock and not have to worry about getting an uptick, which means that when the stock starts to tank you can just go short by hitting the bid.
Like I said it is generally used by traders who trade that particular issue a lot. Typically, a connversion/bullet will cost you a couple hundred dollars a month and you have it usually for 3 or 4 months (till expiration). And you're right, when you sell the stock, you are naked, which is why you are "effectively short".
One great example of this is over at Bright Trading. They actually have a person in their back office who specializes in creating conversions and bullets for their traders. Sometimes, it takes a few days before they can actaully get it in place, because as you pointed out, they have to wait for the spreads to be just right. But I would say that at least 2/3 of all the traders they have carry 2 or 3 conversions at all times. Its an essential tool to have if you are a daytrader because it allows you to short a stock and not have to worry about getting an uptick, which means that when the stock starts to tank you can just go short by hitting the bid.
MM - I understand what you were getting at now. If you can put the conversion on for close to net zero, you could use it as a kind of cover for selling the long equity and buying it back at a lower price (effectively the benefit of shorting without actually shorting the equity).
That might work OK at some place like Bright, but I can't see most brokers being too cool with it unless you have sufficient capital to do naked short calls. I could do this at Preferred, but it's probably not a "general tool" for most traders. A lot of brokers are like Preferred and have a $100K minimum equity and a lot of option experience before they'll let you hold naked short calls.
Have you had much problem shorting most stocks you wanted to short that you had to resort to doing this?
Thanks for the info.
That might work OK at some place like Bright, but I can't see most brokers being too cool with it unless you have sufficient capital to do naked short calls. I could do this at Preferred, but it's probably not a "general tool" for most traders. A lot of brokers are like Preferred and have a $100K minimum equity and a lot of option experience before they'll let you hold naked short calls.
Have you had much problem shorting most stocks you wanted to short that you had to resort to doing this?
Thanks for the info.