Help a noob out- is this a risk free transaction?

[doctorbonez]

I'm fairly new at options, basically have just been writing covered calls.

With the recent volatility and availability of leveraged inverse ETFs, would this be considered a risk free transaction?


Long TNA
Sell a covered call at specific strike
Short TZA
sell covered call at the same strike

Theoretically, as the underlying moves one way or the other, the ETFs should cancel out the movements (say for aug so you don't loose much on the decay inherent in leveraged ETFs)
The covered calls should theoretically should move in inverse directions as well, allowing you to capture the time decay risk free.

What am I missing?

 

[donnap]

Quote from doctorbonez:

.....would this be considered a risk free transaction?


Long TNA
Sell a covered call at specific strike
Short TZA
sell covered call at the same strike

Theoretically, as the underlying moves one way or the other, the ETFs should cancel out the movements (say for aug so you don't loose much on the decay inherent in leveraged ETFs)
The covered calls should theoretically should move in inverse directions as well, allowing you to capture the time decay risk free.

What am I missing?

If the ULs cancel each other out, then you have no cover.

Assuming that your statements are correct, you'd have the equivalent to a short straddle.

 

[atlTrader666]

No such thing as risk free my friend... you can find the perfect arbitrage situation but you will always have COUNTERPARTY RISK

 

[doctorbonez]

Sorry, reversed a position..

a) Long TNA (russell 2000 bullish 3x leverage)
b) Sell a covered call of TNA at specific strike
c) Long TZA (russell 2000 bearish 3x leverage)
d) sell covered call of TZA at the same strike as b)

 

[TheGoonior]

Quote from doctorbonez:

I'm fairly new at options, basically have just been writing covered calls.

With the recent volatility and availability of leveraged inverse ETFs, would this be considered a risk free transaction?


Long TNA
Sell a covered call at specific strike
Short TZA
sell covered call at the same strike

Theoretically, as the underlying moves one way or the other, the ETFs should cancel out the movements (say for aug so you don't loose much on the decay inherent in leveraged ETFs)
The covered calls should theoretically should move in inverse directions as well, allowing you to capture the time decay risk free.

What am I missing?

I'm guessing that you mean you are long both TNA and TZA and short the respective calls instead? In this case, you are only partially hedged...up until you exceed the call strike price in either direction, in which case you've capped your upside but not your downside (though you've offset it somewhat).
This shares some similarities to an option position known as the "double diagonal spread" (except you are using shares instead of long options), so you may want to do some research on that for more information.

 

[hajimow]

Let me give you my response with an example.

TNA is 48.37 and call 50 Sept is $5
TZA is $45.06 and Call 50 Sept is $4

If on Sept expiry TNA and TZA close at the current price, you will make money. Now consider a case that market goes up 15%. and so TNA and TZA will move 45%. So TNA will be about 48.37+45%= $70.13 and TZA will drop 45% to $24.73.

You have made about $6.63 in TNA and have lost (45.06-24.73+4 = $24.33

So in total you have lost $24.33 -$6.63= $17.7 which is $1770 per pair.

Let me know if you are still confused.

 

[Moderate]

download thinkorswim and do it go to 'risk profile'

 

[doctorbonez]

Quote from hajimow:


Let me know if you are still confused.

Thanks for the example, it makes sense. knew I was missing something. (just had no idea it was so obvious.. ) so the pay off chart would look like a short straddle?


btw. I've had TdW since they were datek.. had known about ToS but never played around with it. Tried for a short period of time today but gave up because it was a pretty complex (wasnt sure how to use two underlyings with the options) I'll have to play around with it some more.

 

[brownsfan019]

Yep, it's risk-free. Congratulations, you cracked the code. You will never lose on this play. Ever.



Really? WTF kind of question is that? Risk-free in the markets.... wow.

 

[KevinO]

Quote from brownsfan019:

Yep, it's risk-free. Congratulations, you cracked the code. You will never lose on this play. Ever.



Really? WTF kind of question is that? Risk-free in the markets.... wow.

He says he's a noob.. You should correct him rather than clown on him.