Lol, with an S&P 500 futures contract, obviously.
extrinsec value itm options Spx Spy
- Thread starter raf_bcn
- Start date
I'm not proposing anything... I'm just saying that you're missing the point regarding dividends already being accounted for in forward pricing in options and futures...
Why wouldn't the options move when the underlying moves???? Of course they will....
In your example, by selling the call and buying the put, you are basically selling the synthetic future at 2408.35... (if SPX options are marked-to-market, which means no interest component since you don't have to put up the total price but only margin).
I don't know what time you wrote down this example... but assuming you took the call bid and put offer... that's indeed not going to make you any money, since you shouldn't trade at the bid/offer but at least try to get a decent price at midpoint.... but this strike is ridiculously far OTM so there will be not much interest... And who would pay 5 cents for that put anyway??? That's just throwing away money. A silly example really...
Let's just agree you are slightly out of your league and should take my and @sle's comments as facts...
Hi
It is a little intimidating to talk to people who plays in a superior league, but i'll try.
JackRab,
_Thanks to your and Robert Morse comments in this thread it became clear to me that Spx options are priced vs the SP or ES future.
The underlying is the SP but the options prices traces the price of the SP future. It was a little confusing in the begining.
It is also clear to me, since a longer time, that futures has a lower price than spot because of the dividends, mainly.
In these lasts posts I have not questioned any of that.
_
And by the way thank you for your respectful qualification for my example.
_
As you know , if you sell an option and hedge you are fixing, freezing, the difference between the underlying price and the amount that you received.
The spx future is going to move towards the spot price as the expiration day approches, but the amount you received for the options won't.
I mean, if you sell an option and hedge, you going to loose if at least you don't receive the intrinsec value of the spot underlying. That seems to me.
That's why I don't understand who is selling Itm calls of SPX below the intrinsec value of the spot underlying. And there is a huge OI in these strikes. Yes again, huge, everybody laughing.
So, somebody is selling.
I was asking you and the others which strategy do you think they are implementing, because don't seem to be any advantage there.
Maybe with your ideas we could improve our knowledge.
And talking about improve, I am back to train to maybe one day be in your league.
thank you
It is a little intimidating to talk to people who plays in a superior league, but i'll try.
JackRab,
_Thanks to your and Robert Morse comments in this thread it became clear to me that Spx options are priced vs the SP or ES future.
The underlying is the SP but the options prices traces the price of the SP future. It was a little confusing in the begining.
It is also clear to me, since a longer time, that futures has a lower price than spot because of the dividends, mainly.
In these lasts posts I have not questioned any of that.
_
Maybe you don't have margin problems but sometimes 5 cents save a lot of margin.
And by the way thank you for your respectful qualification for my example.
_
As you know , if you sell an option and hedge you are fixing, freezing, the difference between the underlying price and the amount that you received.
The spx future is going to move towards the spot price as the expiration day approches, but the amount you received for the options won't.
I mean, if you sell an option and hedge, you going to loose if at least you don't receive the intrinsec value of the spot underlying. That seems to me.
That's why I don't understand who is selling Itm calls of SPX below the intrinsec value of the spot underlying. And there is a huge OI in these strikes. Yes again, huge, everybody laughing.
So, somebody is selling.
I was asking you and the others which strategy do you think they are implementing, because don't seem to be any advantage there.
Maybe with your ideas we could improve our knowledge.
And talking about improve, I am back to train to maybe one day be in your league.
thank you
The future is basically spot + interest over the spot. The interest gradually decreases, since time to maturity decreases, which makes the future drop towards the index level.
When there is dividend involved, when stocks go ex-dividend the spot (and also index spot) drops towards the future. Interest component is more or less a given fact, so is the dividend amount... since one assumes the dividend is more or less known.
These are the basic workings of a future.
So when dividend is involved, the index/spot actually moves towards the future, not the other way around.
If you sell a deep ITM call and hedge it with buying futures... assuming you receive the full amount of the call premium, you would park that cash receiving interest on it. So while the bought future seems to drop towards the index spot due to the decaying of interest component... the call seems to stay at the same value.... but, you are actually receiving interest on the premium collected....
That's how (normally) it works. Trading firms have access to better interest rates, closer to the real ones... they hardly pay any markups. So therefore, the amount received through the interest on call premium would cover the amount lost on the futures interest component decaying.
Since professional traders trade in and out of position risks by hedging with other options... they will end up with an options book with positions in just about every strike... whereby say long 10k calls strike 2400... and short 10k puts strike 2400, fully delta hedged with futures... is a flat position. No risk in rho/delta/gamma/vega, so no position.
When you do large trades and your aim is minimizing risks... you first look at delta, and cover that risk with Delta hedging through futures/stocks/underlying. Second you look at Gamma, and hedge that by buying or selling the opposite gamma through other options, preferably in the same strike/month. Same with Vega... same with dividend exposure/Rho... etcetcetc.
So while it seems to you that the 2400 call has a huge open interest.... the one who actually has that open interest doesn't see it as that, since he looks at his entire options book and is probably close to a flat position.
Some guy at a fund or bank wanted to buy some 2400 calls... to hedge his short position or to speculate upwards... or maybe speculate on down move and sold 100% futures...
That guy ends op buying it from one or more other parties, banks/market makers/other funds who sell it because they get a good price or it... they hedge the way I just explained. Delta, Gamma, Vega... they all end up with positions in other strikes/months, creating a risk balanced position. That's their strategy... Many people have different strategies. You never know what position someone has before or after a trade...
Jack is spot on. He just gave a multi thousand dollars option class for free
Is it too late to ask for a few bitcoins
....This was just 'back of the book' excerpt... to draw you guys into buying my book where I explain how to actually make gazillions...
adopt me, thanks
Hi
First I want to say that it is to be appreciated that someone writes a post like this.
I find a bit exaggerated to say it is a multi thousand dollar class, but almost . You have good followers and that is good.
Yes, It was difficult and counterintuitive for me but now i've seen. Thank you.
If the market closes today, no more transactions, the spot price will decrease every day, since the companies cotinue to pay dividends. Aprox. 7 dollars every 3 months.
_One question. On the ex-dividend date of one comapy, the price of the future and the price of the share have to be the same?
If we omit the interests. Since price of future = spot -dividends then spot= price of future + dividends
On ex dividend date the price of spot will drop by the amount of dividends,
so new spot= spot - dividens then new spot= price of future
Then maybe if on the ex-dividend date we buy shares and sells futures we are hedging and will obtain the dividend without risk, on the expiration day.
Sorry I am thinking out loud, maybe missing something, or maybe very obvious for everyone.
It has to be fun trading in that conditions, and without margin requirements, and with capital.
Small accounts like mine doesn't receive interests, it's from 100.000,00 dollar accounts.
_If the strategy isn't closed until expiration, the only hedge that is needed is price hedge. Maybe the greeks aren't so importants in that case.
I like that kind of strategies.
Thank you
First I want to say that it is to be appreciated that someone writes a post like this.
I find a bit exaggerated to say it is a multi thousand dollar class, but almost . You have good followers and that is good.
Yes, It was difficult and counterintuitive for me but now i've seen. Thank you.
If the market closes today, no more transactions, the spot price will decrease every day, since the companies cotinue to pay dividends. Aprox. 7 dollars every 3 months.
_One question. On the ex-dividend date of one comapy, the price of the future and the price of the share have to be the same?
If we omit the interests. Since price of future = spot -dividends then spot= price of future + dividends
On ex dividend date the price of spot will drop by the amount of dividends,
so new spot= spot - dividens then new spot= price of future
Then maybe if on the ex-dividend date we buy shares and sells futures we are hedging and will obtain the dividend without risk, on the expiration day.
Sorry I am thinking out loud, maybe missing something, or maybe very obvious for everyone.
It has to be fun trading in that conditions, and without margin requirements, and with capital.
Small accounts like mine doesn't receive interests, it's from 100.000,00 dollar accounts.
_If the strategy isn't closed until expiration, the only hedge that is needed is price hedge. Maybe the greeks aren't so importants in that case.
I like that kind of strategies.
Thank you
No, I don't think you are getting it yet. Here is an alternative explanation.
A futures contract is nothing more then an agreement to deliver the stock on expiration date (let's forget about cash settlement for a second). The question is - what would be a fair price for the stock delivered in N days? If I have promised to deliver a stock in the future, I would
(a) first of all want to buy the stock so the price does not run away
(b) to do (a), I am using cash so I am essentially lending you money
(c) however, I get to keep the dividends since I own the stock over this period.
So based on these three components, the fair price for the stock in N days is stock price today (a) plus interest on cash for N days (b) minus whatever dividends that I'll get to keep (c).
If you buy the stock on the ex-date this means that you do not get to get the dividend, it's been allocated away and is sitting in a custodian bank account. So your strategy would not work, the only thing you are doing is essentially lending money to the buyer of the futures contract.
Hi
Here we had a good explanation of what is a fair future price.
With the intention of better understanding how works the interrelation between spot price and future price.
The strategy I was thinking in the las post is buy stock and sell future on the ex-dividend date. Objective, the share will accumulate the dividends and the future no, so the share will increase its value and will be hedged.
The day before the ex dividend we close the position.
The mechanism by which the interests accumulate into the share are important.
_ On the exdividend date, the share, the stock, is empty of dividends, and from then it began to accumulate the dividends, until the day before the ex-dividend date.
I mean the dividends that are going to be distributed. If it's wrong please say why.
_ The SSF price, single stock future, is spot - dividends because the buyer don't think it is fair to pay for the dividends he is not going to receive, but there are included in the share price.
One question is, on the ex-dividend date are any dividend still included in the stock price ? or the stock is empty of dividends .
Another question is, on the ex-dividend date the future drops by the amount of the dividend? the spot does.
Let's say there are no market forces directly involved in a company share price.
spot price on ex-dividend date__100
next ex-dividend date__90 days
estimated dividends__3
The spot price is going to move progressively from 100 until 103 the day before it goes ex-dividend.
what is the today's price of the 90 dte future ?. Without considering interests. And, will remain the same value during the 90 days or is going to move following the spot price. I think it's going to stay.
Until in this thread was said that the spot moves direction the future I thought it was the other way. So, I thouhgt the correct srategy was buy futures and sell spot, because the price of the future is going to increase more compared to the spot price.
Thank you.
Here we had a good explanation of what is a fair future price.
With the intention of better understanding how works the interrelation between spot price and future price.
The strategy I was thinking in the las post is buy stock and sell future on the ex-dividend date. Objective, the share will accumulate the dividends and the future no, so the share will increase its value and will be hedged.
The day before the ex dividend we close the position.
The mechanism by which the interests accumulate into the share are important.
_ On the exdividend date, the share, the stock, is empty of dividends, and from then it began to accumulate the dividends, until the day before the ex-dividend date.
I mean the dividends that are going to be distributed. If it's wrong please say why.
_ The SSF price, single stock future, is spot - dividends because the buyer don't think it is fair to pay for the dividends he is not going to receive, but there are included in the share price.
One question is, on the ex-dividend date are any dividend still included in the stock price ? or the stock is empty of dividends .
Another question is, on the ex-dividend date the future drops by the amount of the dividend? the spot does.
Let's say there are no market forces directly involved in a company share price.
spot price on ex-dividend date__100
next ex-dividend date__90 days
estimated dividends__3
The spot price is going to move progressively from 100 until 103 the day before it goes ex-dividend.
what is the today's price of the 90 dte future ?. Without considering interests. And, will remain the same value during the 90 days or is going to move following the spot price. I think it's going to stay.
Until in this thread was said that the spot moves direction the future I thought it was the other way. So, I thouhgt the correct srategy was buy futures and sell spot, because the price of the future is going to increase more compared to the spot price.
Thank you.