GM option play

[CloroxCowboy]

Quote from nazzdack:

1) Was it?.... Answer: "It depends on when you exited".
2) You can get out of GM "at the market".
3) I prefer to rent boats, not own them.
4) Too many people are paralyzed at the thought of short-selling because they have an irrational fear that whatever they short-sell will all of a sudden go to "infinity". It's silly, ridiculous, paranoid and pessimistically-biased.

Pretty sure I never said I was "paralyzed at the thought" of anything...I'll need to double check though, it's all the way at the top of the page.

Also, I think the spectre of "infinity" was your addition to this post, not mine. I'd be pretty pissed to put on a naked GM call and have it go to 10...unlikely but within the realm of possible.

Basically, if you could just loan me your crystal ball so I know when a black swan is about to sh$t on my head then the whole thing becomes a non-issue...

 

[CloroxCowboy]

Quote from atticus:

They're identical, excluding changes in financing. I am referring to the synthetic short call [short spot/short put] vs. the natural short call -- coupled with the long May call.

Selling the natural call instead of the synthetic with short stock. He should buy the May call as well, that's not the point. My point was simply that it's best to avoid the stock in the equation.

I see. Unfortunately, there is probably no choice but to avoid the stock right now. However, with a put IV of around 300% and a call IV of around 120%, the advantage should be toward the synthetic short call, no? What would the HTB rate be if you could find a broker with inventory shares?

 

[nazzdack]

Quote from CloroxCowboy:
....pissed.....sh$t.....

1) Traders aggressively short-selling penny stocks and trading options with strike prices less than $3/share can be cause for "concern".
2) Instead of sucking the marrow out of the chicken bone, just grab another piece of chicken to eat instead.

 

[CloroxCowboy]

Quote from nazzdack:

1) Traders agressively short-selling penny stocks and trading options with strike prices less than $3/share can be cause for "concern".
2) Instead of sucking the marrow out of the chicken bone, just grab another piece of chicken to eat instead.

I'm with you on that! This is not my type of trade, but still good for an option pricing pop-quiz.

 

[atticus]

Quote from CloroxCowboy:

I see. Unfortunately, there is probably no choice but to avoid the stock right now. However, with a put IV of around 300% and a call IV of around 120%, the advantage should be toward the synthetic short call, no? What would the HTB rate be if you could find a broker with inventory shares?

That's the rub, the apparent violation of parity [reversal arb] isn't exploitable. You need to source the short and be certain you're not paying usurious rates on the borrow. Obviously, earning 50bp on your credit balance isn't going to help much if your broker charges you 60% to keep the short.

 

[spindr0]

Quote from nazzdack:

[4) Too many people are paralyzed at the thought of short-selling because they have an irrational fear that whatever they short-sell will all of a sudden go to "infinity". It's silly, ridiculous, paranoid and pessimistically-biased.

And yet they feel comfortable buying a $50 or $75 stock because it can only go to zero

 

[spindr0]

Quote from CloroxCowboy:

What would the HTB rate be if you could find a broker with inventory shares?

IB shows ZERO lenders with available inventory with an indicative rate of -109.62%.
That kinda puts a crimp in the idea

 

[nazzdack]

Quote from spindr0:
....it can only go to zero

They imagine it going to infinity. That's called "optimism".

 

[newguy05]

Quote from atticus:

They're identical, excluding changes in financing. I am referring to the synthetic short call [short spot/short put] vs. the natural short call -- coupled with the long May call.

Selling the natural call instead of the synthetic with short stock. He should buy the May call as well, that's not the point. My point was simply that it's best to avoid the stock in the equation.

atticus, what do you mean by changing from the synethic short call to the natural short call

3) buy the may 2.5C for $0.15 remains the same

from synthetic short call:
1) short the stock at $1.75
2) sell the sept 2P for $1.4

to:
1) sell the sept 2C for $0.5

which is converting the short spot to a synthetic short(buy 2P, sell 2C), the 2P cancels each other out, and you are left with a diagonal spread: short 2C and the original long may 2.5C.

But that has a lot less profit than the original trade due to the put/call IV disconnect. And the original trade wont work because you cant short the spot.

So the max profit if gm goes boom is 0.5 - 0.15, which doesnt seem to be worth it.

 

[atticus]

Quote from newguy05:

atticus, what do you mean by changing from the synethic short call to the natural short call

3) buy the may 2.5C for $0.15 remains the same

from synthetic short call:
1) short the stock at $1.75
2) sell the sept 2P for $1.4

to:
1) sell the sept 2C for $0.5

which is converting the short spot to a synthetic short(buy 2P, sell 2C), the 2P cancels each other out, and you are left with a diagonal spread: short 2C and the original long may 2.5C.

But that has a lot less profit than the original trade due to the put/call IV disconnect. And the original trade wont work because you cant short the spot.

So the max profit if gm goes boom is 0.5 - 0.15, which doesnt seem to be worth it.

I was factoring p/c parity, which assumes that the same-strike call and put will trade at =volatility. Obviously you cannot sell the call at 1.25 due to the HTB and financing costs associated with the short-shares. IOW, you're screwed either way. Either sell the stock short at 100% borrowing or sell the natural call at the much lower volatility.

The call is cheap because the borrowing costs are embedded in the put. Sure, you can sell that 300% put, but it may cost you 100% [$1.86] per annum to hold the borrowed short.

The implied forward is in backwardation, hence the discount/premium on the call/put. You're right, it's not worth it, but not because the put is a good sale coupled with short spot. The borrowing costs are not fixed and will likely exceed the premium collected on the put.

The volatility on the natural call reflects the net-vol. The 300% put vol is just a number in isolation and is worthless w/o taking into account the costs associated in undertaking the synthetic short call [S-2p, S-GM]. Interactivebrokers' carry on a GM $2 strike exceeds the implied carry in the option market. It's moot as the short can be pulled at any time. And no, the conversion is not an arb.