Is this a risk free options trade?

[atticus]

Quote from m22au:

Underlying stock is at 10.11

The following options all have the same expiry:

10.00 call (bid) $1.60
11.00 call (ask) $1.20

10.00 put (ask) $1.40
11.00 put (bid) $2.15

sell an equal number of
10.00 calls at 1.60
11.00 puts at 2.15
and buy an equal number of
11.00 calls at 1.20
10.00 puts at 1.40

You're short the 10/11 outside strangle and long the 10/11 inside strangle, short the box.

Consider the position as two identical payoffs; in this example, a short inside [synthetic] straddle and the long outside [natural] straddle. You can use the vertical or strangle arb, or use stock and consider the synthetic long and short.

Short the inside for 3.75 less the $1 strike differential, leaving 2.75. Long the natural at 2.60 leaving a credit of $.15 as stated.

The apparent edge, less commissions is the risk-premium of assignment and pinning. There is more to it, but you've omitted duration.

 

[m22au]

Thank you for your feedback atticus, it's clear from your post that you know a lot more about options than me.

The options expire in June - I think this might be what you mean by "duration" ?

xflat mentioned assignment, which I will watch on a daily basis.

Donnap mentioned pin risk, which means that I'll keep an eye on the situation at expiry.

Quote from atticus:

You're short the 10/11 outside strangle and long the 10/11 inside strangle, short the box.

Consider the position as two identical payoffs; in this example, a short inside [synthetic] straddle and the long outside [natural] straddle. You can use the vertical or strangle arb, or use stock and consider the synthetic long and short.

Short the inside for 3.75 less the $1 strike differential, leaving 2.75. Long the natural at 2.60 leaving a credit of $.15 as stated.

The apparent edge, less commissions is the risk-premium of assignment and pinning. There is more to it, but you've omitted duration.

 

[moarla]

with 0 risk 0 gain.

 

[xflat2186]

Quote from m22au:

Thank you very much xflat.

You are 100% correct about that risk, and I'll deal with it if and when I get assigned on the $11 put.

However given that the put has a large time premium (is that the correct terminology?), it is unlikely that I will be assigned soon.

It's more likely that I will get assigned if/when the stock falls much further, in which case I can exercise my $10 put.

Actually the time premium on the put would include the premium to short the stock so if the stock you're talking about is a hard to borrow stock with an high premium to borrow the stock you're likely to get assigned early.

 

[atticus]

Quote from xflat2186:

Actually the time premium on the put would include the premium to short the stock so if the stock you're talking about is a hard to borrow stock with an high premium to borrow the stock you're likely to get assigned early.

Yeah, but the synthetic 10-long [one example] is trading above the shares [using m22au's quotes]. I'd assume it's not an issue of hard to source.