Disparity XSP vs SPX

H

heiasafari

When I look on the CBOE's website concerning the mini-spx options, it really says they are exacty 1/10 of the regular spx contract. The live quotes of both of them do confirm that.

http://www.cboe.com/micro/xsp/introduction.aspx

My problem is with the apparent disparity in the way the options of the corresponding strike and month are priced. There does - and quite often - seem to be a possibility of arbitrage between the 2 of them and every theory or book indicates these would not last.

Is there something I am missing about these guys?
 
The ten by ones are possible, no there is nothing wrong with these guys. After commission how much is left?

You can do SPY/SPX ten by ones at similar strike prices and the american style contracts do run a little higher. But most margin accounts don't account for the hedge. End result: a trader ends up tying up a ton of cash for small beans.
 
I am not an expert on this but from what I have heard about this is you are up against guys like Citadel and Chicago One. These guys have the fastest computers known to man and algorithms that make algorithms look bad. By the time your finger twitches to hit the button they will pick you off. Even with market maker commissions it is hard to compete. But maybe I am wrong as I am no expert.
 
No your are right. I have never put on one of these trades because a hundred bucks or so is not worth tying up 35 thousand dollars in margin requirements.
It is not pure arbirtrage, there is some risk, if one get callled out on the American options regardless of the SPX hedge. Plus small price differences near dividend payouts on SPY.

The XPS SPX combo, I think somebody is not looking closely enough at bid/ask speads. The arb is is not there. Any arb will be eaten up by commissions.
 
Lets say you can make 100 dollars a month on te SPX/SPy combo. The margin requirements amount to 30 dollars. You make 1,200 dollars a year doing front month arb. That is not any better than a bond and marginally better than the risk free interest rate.
 
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