costless collars
- Thread starter Ozzy_34
- Start date
No, no, no....it has nothing to do with the Fed. You are NEVER going to be able to sell an OTM call to buy an ATM put. Just think about the math for a second. If you are long stock at a 100 and sell the 105 call for a 1 dollar and buy the 100 put for 1 dollar, that means you just bought the 100/105 vertical for nothing!!!!! That's a free trade with 5 pts of upside and ZERO downside. That is NOT mathematically possible.
ok, i got that. would a trade exist where , using your example, you buy the put for 1 dollar, and sell the call for around 70 or 80 cents? I come across examples such as those on different articles, but can never find anything near this on the options chain. My guess is even those don't exist or are hard to find.
Right, to be sure, we're just talking about the fwd vs spot thing here, right? It's not that interest rates are priced differently in calls and puts, but rather that higher rates/divs used to imply that the relevant stock fwd (assuming expiry is far enough away) is quite a bit higher than spot. I can understand this, but the terminology is confusing to me as I just don't associate this with options.
Yes, this I find extremely difficult to imagine.
FED printing money -> stocks are denominated in USD -> no random walk for stock, they are slowly rising from USD "point of view" -> this is of course affecting prices of options, because if stock is used in position construction with options (stock used as hedge), its probability of move up needs to be incorporated to our calculations to trade for at least fair price.
For example:
1. If I wanted to sell call SPX call option with expiration 7/11/2014, then from my point of view strike of ATM call option will be +0.48% above actual price of SPX. Each day this difference is changing...
2. For AAPL I consider call ATM option with expiration 7/11/2014 with strike 1.32% above actual price based of probability of move. I mean selling of option again with 50% win. For buying of option my number will be different.
...
So whole option matrix is kind of shifted upwards more than without QE.
And of course we have simple thing like fear of stock owners -> buying puts -> underlaying probability of moves is not in match with put prices - they are usually overpriced.
This will be probably in markets always, and if not, my system will automatically adapt
For example:
1. If I wanted to sell call SPX call option with expiration 7/11/2014, then from my point of view strike of ATM call option will be +0.48% above actual price of SPX. Each day this difference is changing...
2. For AAPL I consider call ATM option with expiration 7/11/2014 with strike 1.32% above actual price based of probability of move. I mean selling of option again with 50% win. For buying of option my number will be different.
...
So whole option matrix is kind of shifted upwards more than without QE.
And of course we have simple thing like fear of stock owners -> buying puts -> underlaying probability of moves is not in match with put prices - they are usually overpriced.
This will be probably in markets always, and if not, my system will automatically adapt
Yeah these hucketsters use different words, in fact most of the time make them up to cover up what they really are. He was not saying the calls or puts were priced differently, it's just that calls have interest costs embedded in them and puts have the carry interest embedded in them (the short interest one earns by being short the stock).
Back to Ozzy here, Ozzy it's important that you understand what you are trying to do. All the collar is is a vertical call spread. So when you are asking can I find cheap verticals for .20 or .30, sure. But that is all you are doing. Buying cheap verticals. It's a debit spread and if the vertical expires out of the money, you lose the .20 or .30. There is nothing magical or special about them or any option trade for that matter. The market is not "giving" you anything.
Erm, this is interesting... So you're saying that the upward "drift" in prices, "caused" by QE, is the reason that the fwd SPX price that you used in your example is 0.48% higher that spot? Ooh-la-la...
Wait, can you explain this a bit? QE causes an upward drift, according to your explanation. What's the logic that implies that this makes calls cheaper than they would be without QE?Hell yeah it has something to do with what Ozzy is asking about
This shift has increased exactly when QE have started and is changing everytime there is change in QE.