My approach to selling puts.

destriero said:
Bro, if that were true then you would short the put, buy the call, and short shares. A reversal. You're long the synthetic at edge and short the natural.

Your IWM numbers are wrong bc the synthetic says so.
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where does the synthetic say that's wrong? not being snarky, i'm genuinely asking.. i know that's a reversal, that was kind of the point i was getting at there

edit: you answered before i responded lol
 
daytonabeach83 said:
where does the synthetic say that's wrong? not being snarky, i'm genuinely asking.. i know that's a reversal, that was kind of the point i was getting at there

edit: you answered before i responded lol
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The synthetic RUT is at 221.02 or something. I closed my screens.
 
if i look at the synth long @ $222 my breakeven is $0.38 below the closing stock price, same if i run it at $222.. correct me if i'm wrong, but the synthetic is showing a $0.38 edge here?

edit: yes, $221.02.. doesn't this validate the point i've been making, that there's an edge in the reversal here because of the skew?
 
daytonabeach83 said:
if i look at the synth long @ $222 my breakeven is $0.38 below the closing stock price, same if i run it at $222.. correct me if i'm wrong, but the synthetic is showing a $0.38 edge here?

edit: yes, $221.02.. doesn't this validate the point i've been making, that there's an edge in the reversal here because of the skew?
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I'm not going over the trade again, but you were pricing the call against a 221.4 figure. Does pricing the call against a 221.4 mark under or over-value the call basis a 221.02 synthetic? It undervalues the call and overvalues the put. Makes you believe that the edge is skew. There is no edge. Wait for a liquid market during the day session (that is skewed). SPY will do and the vol is 1-2 cents wide.

The synthetic has embedded rates/div/carry over the tenor in question. The ETF price does not.
 
destriero said:
I am stating that you have to price the arb against the forward and not the share price. You'd be lulled into trading reversals if simply going by the share price. It's a lock. The payoff is equivalent if you're trading them at mid. Can they be a few pennies off? Sure, but they are fungible. Truly. Nobody with any sense is going to buy shares as a vehicle to write the call. There are many reasons not to do it (microstructure, comms, wash sale fvckery), but they aren't different.

Most arbs have rho (opportunity risk in euro-conv) as a function of the edge, but that doesn't factor into singles.
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What I mean by this is the $rho is artifact of your edge on the box, roll, whatever. Not the risk on the synthetic vs. shares.
 
destriero said:
I'm not going over the trade again, but you were pricing the call against a 221.4 figure. Does pricing the call against a 221.4 mark under or over-value the call basis a 221.02 synthetic?

The synthetic has embedded rates/carry over the tenor in question. The ETF price does not.
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not too well-versed in how the carry rates are embedded, tho i'm familiar with the idea that call skew can be a function of short interest/carry fees, guessing that's the basic jist there?

to your question, probably not the right way to do it, but i'd extrapolate from this that there's a $0.38 pricing discrepancy that is equivalent to the carry fee for shorting the stock so the arb is a lock, and that $0.38 seems to be a function of overpricing the put, not under pricing the call?

but if you're running it as a directional trade, just going the long the stock, you're going to be collecting that carry fee basically for entering the synthetic.. still long 100 shares, but with a reduced cost basis..

also, to be clear, i'm coming at this from the perspective of a directional trader.. arb after the stock makes a favorable move and you run a conversion/synthetic close, not arbing on trade entry.. might be part of why i'm thinking of it so differently?
 
destriero said:
What I mean by this is the $rho is artifact of your edge on the box, roll, whatever. Not the risk on the synthetic vs. shares.
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so, basically, what i was asking/clarifying in my last reply? that the $0.38 is just the carry cost for shorts being factored into the options pricing?

that i get.. but for a directional trader, you can still long the stock below current price using the synthetic, due to the carry costs being priced in as skew?
 
All that I am stating here is that there is no vol/skew component to the arbitrage relationship. Even in RUT/IWM. It would help to price things in vol in lieu of premium. Anyone here can find a mispricing off of live quotes, but execution is another matter. In order of complexity:

call/put to synthetic put/call
call and put time spreads
call and put verticals (box arb)
call and put complex spreads/irons (combos)
call and put diagonals (roll arb)
 
daytonabeach83 said:
so, basically, what i was asking/clarifying in my last reply? that the $0.38 is just the carry cost for shorts being factored into the options pricing?

that i get.. but for a directional trader, you can still long the stock below current price using the synthetic, due to the carry costs being priced in as skew?
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The thing you're calling skew is (YOUR) bad mark. You need to understand synthetics and their role in maintaining liquidity. It's not so much that they trade, but how prices move on the assumption of a delta-lock.
 
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