How about this trading strategy?

M

mydann

Now it's March 13, 2007, 1:40PM EST, the Intel is trading at 19.27/19.28 and its 2009 Jan 10.00 Call is trading at 9.60/9.70.

Let's say if you have $100K and trade through IB, you can position as
Short 100,000 Intel 1,927,000 credit
Long 1,000 Jan call 970,000 debit

$100,000 + $1,927,000 - $970,000 = $1,057,000 credit.
With the amount deposit in IB or T-bill, you can get at least 8% over the almost 2 years period by Jan 2009.
$1,057,000 * 0.08 = $84,560

By Jan 2009, you have $1057,000 + $84,560 = $1,141,560. When the call expires on Jan 16, 2009, you pay $1,000,000 for the difference of short and call. Now you have $141,560 in your account. That's more than 20% annual return with zero risk. To be better, it is long capital gain.

(FYI, if intel should go down to $15 or less in the two years, you would make more money. Total commission is 0.5K+0.75K=1.25K.)
 
Obviously the poster is not aware of a few things, no matter how rosy it looks on paper.

1) He left out short interest on his huge margin.

2) He does not realize that many brokers do not pay you interest on short proceeds.

3) A Reg T account will never let you take on such position risk, maybe a haircut account. Long calls cannot be bought on margin.

4) The poster assumes 4% a year interest which is not far from half of what margin interest one would pay on the short position.

Sorry... no free lunches. If someone is lending you money to short stock, don't you think they will charge you interest for it?


Quote from mydann:

Now it's March 13, 2007, 1:40PM EST, the Intel is trading at 19.27/19.28 and its 2009 Jan 10.00 Call is trading at 9.60/9.70.

Let's say if you have $100K and trade through IB, you can position as
Short 100,000 Intel 1,927,000 credit
Long 1,000 Jan call 970,000 debit

$100,000 + $1,927,000 - $970,000 = $1,057,000 credit.
With the amount deposit in IB or T-bill, you can get at least 8% over the almost 2 years period by Jan 2009.
$1,057,000 * 0.08 = $84,560

By Jan 2009, you have $1057,000 + $84,560 = $1,141,560. When the call expires on Jan 16, 2009, you pay $1,000,000 for the difference of short and call. Now you have $141,560 in your account. That's more than 20% annual return with zero risk. To be better, it is long capital gain.

(FYI, if intel should go down to $15 or less in the two years, you would make more money. Total commission is 0.5K+0.75K=1.25K.)
More...
 
This is called a synthetic long put. In other words, it is exactly the same position (i.e. same max profit, same max risk, which is the premium paid for the put).

Sorry, it ain't a free lunch!

I love these guys that come to the market and think that they are just smarter than everyone else!:D
 
I am coming here for discussion or learn from trade elite. If there is anything wrong with my strategy, I appreciate your opinion.
The only risk I can see in this strategy is the dividend.


[1) He left out short interest on his huge margin.]
Sell 100K INTC and paid $1.927M
Buy 1K +VNLAB (INTC 2009 Jan Call @ 10) and pay $970K
The total is $957K CREDIT. Do you suggest that I should pay broker interest on $970K from buying call?

[2) He does not realize that many brokers do not pay you interest on short proceeds.]
See below.

[3) A Reg T account will never let you take on such position risk, maybe a haircut account. Long calls cannot be bought on margin.]
Here is a direct quote from IB's margin requirements:
Protective Call
Long Call and Short Underlying.
<Initial Margin Reqirement>
(Initial standard stock margin requirement). Long call cost is subtracted from cash, short stock proceeds are applied to cash, and short position is subtracted from equity with loan value.
Not allowed for IRA accounts.
<Maintenance Margin Requirement>
Minimum ((10% * aggregate call exercise price) + (100% * out of money amount), (stock maintenance margin requirement)).
N/A.

[4) The poster assumes 4% a year interest which is not far from half of what margin interest one would pay on the short position.]
Here is a direct quote from IB's interest on short position:
USD >100,000 4.048% (BM - 1.25%) >1,000,000 4.798% (BM - 0.5%) >3,000,000 5.048% (BM - 0.25%)

[This is called a synthetic long put. In other words, it is exactly the same position (i.e. same max profit, same max risk, which is the premium paid for the put). ]
Yes, it is called synthetic long put or protective call in IB.
 
Quote from mydann:

I am coming here for discussion or learn from trade elite. If there is anything wrong with my strategy, I appreciate your opinion.
The only risk I can see in this strategy is the dividend.


[1) He left out short interest on his huge margin.]
Sell 100K INTC and paid $1.927M
Buy 1K +VNLAB (INTC 2009 Jan Call @ 10) and pay $970K
The total is $957K CREDIT. Do you suggest that I should pay broker interest on $970K from buying call?

[2) He does not realize that many brokers do not pay you interest on short proceeds.]
See below.

[3) A Reg T account will never let you take on such position risk, maybe a haircut account. Long calls cannot be bought on margin.]
Here is a direct quote from IB's margin requirements:
Protective Call
Long Call and Short Underlying.
<Initial Margin Reqirement>
(Initial standard stock margin requirement). Long call cost is subtracted from cash, short stock proceeds are applied to cash, and short position is subtracted from equity with loan value.
Not allowed for IRA accounts.
<Maintenance Margin Requirement>
Minimum ((10% * aggregate call exercise price) + (100% * out of money amount), (stock maintenance margin requirement)).
N/A.

[4) The poster assumes 4% a year interest which is not far from half of what margin interest one would pay on the short position.]
Here is a direct quote from IB's interest on short position:
USD >100,000 4.048% (BM - 1.25%) >1,000,000 4.798% (BM - 0.5%) >3,000,000 5.048% (BM - 0.25%)

[This is called a synthetic long put. In other words, it is exactly the same position (i.e. same max profit, same max risk, which is the premium paid for the put). ]
Yes, it is called synthetic long put or protective call in IB.
More...

We can discuss the margins and the cost of carry till the cows come home, but the bottom line is that whatever the equivalent put is trading at is your risk on this trade! That's how options are priced! If you don't know this then pick up a book on options and study the put-call parity.
 
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