Interest Earnings on Collar - Minor Risk, but Major Reward

J

jones247

I'm not sure if this technique is better suited in the forex forum or the options forum. Nonetheless, here it is... putting on a long options collar with the gbpjpy or any currency pair that pays a substantial swap interest. You won't make any money if the market goes up (due to shorting the call) and you won't lose if the market goes down (due to going long on the put). However, the daily swap interest on a leveraged account (100:1) can feasibly yield 10%+ per month on the invested capital.

Typically, a put is more costly than the call; however, there are ways to easily mitigate the difference.

Any thoughts...

Walt
 
Quote from jones247:

You won't make any money if the market goes up (due to shorting the call) and you won't lose if the market goes down (due to going long on the put).
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I'm no expert on currency markets, but don't you only eliminate the directional profit and loss if your "collar" has both options at the same strike? And doesn't that make your position a long plus a synthetic short?
 
What I understand you are proposing is a conversion (long pair, and short the synthetic). If you do that, then I think you will make no money because what you make on long pair you pay it in the short synthetic which will sell for a discount to take into account interest earned on pair. Did you try placing puts and calls at different strikes? It is late now here and I need to go to bed, so I apologize if I misunderstood what you wrote.
 
The interest rate differential is priced into options so I don't see how you could earn anything. Whatever you gain on the underlying you lose on the options.
 
As everyone has said the swap is priced into the conversion. You can work the yield curve by having your underlying out on a different date then the settlement of the options but now you have rho risk. There is no such thing as a free lunch. There used to be ways to capture that swap using inefficiencies in the options on physical currencies that were very popular on the Philly floor more then 10 years ago. That opportunity is long gone.
 
Quote from jones247:

Exactly, as a long & synthetic short they'll offset each other. The key is to earn daily swap interest on the long.

Walt
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Lol.

I'm sure your counterparty is just dying to give you a risk free monthly income.
 
To coin Nassim Taleb's mantra... it's all about dynamic hedging. In order for this to work it cannot be a "set & forget" strategy. The key is to sell the put option when it loses 50% - 75% of it's value. By selling and redeeming part of the cost of buying the put, it then neutralizes the additonal premium built into the put that accounted for swap interest. Of course, the big risk is the the currrency pair could plummet while you're now left with no downside protection. At the point of liquidating the put that I orginally bought, I would enter a stop loss for the underlying asset eqivalent to the original price minus the premium received from the shorting of the call.

Walt
 
Quote from jones247:

To coin Nassim Taleb's mantra... it's all about dynamic hedging. In order for this to work it cannot be a "set & forget" strategy. The key is to sell the put option when it loses 50% - 75% of it's value. By selling and redeeming part of the cost of buying the put, it then neutralizes the additonal premium built into the put that accounted for swap interest. Of course, the big risk is the the currrency pair could plummet while you're now left with no downside protection. At the point of liquidating the put that I orginally bought, I would enter a stop loss for the underlying asset eqivalent to the original price minus the premium received from the shorting of the call.

Walt
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So you're short a synthetic put after the pair has rallied. How does this related to a capture of the swap? You're not neutralizing anything. The put still retains it's swap value regardless of delta gains.

Perhaps we can cross this trade as counterparties.
 
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