Naked put... eats like a mouse, sh!t like an elephant

[sellingrich]

They just got a billion buck infusion, so you might be OK.

 

[Prevail]

Quote from riskfreetrading:

I thought to step aside a bit, and let others contribute. I will allow donnap to take the lead in answering your question, which can be achieved in multiple ways.

D. did well. Do you have an example?

 

[Prevail]

Quote from donnap:

I am not disputing this. I am attempting to illustrate a position that fits RFT's description.

Interest rates are so low it's not easy to find a good, clear example without going out in time. Look at GOOG Jan '09 options. Selling the 480C and buying the 460P can be done for a small debit, say 2 pts at fair prices. The investment would be nearly 46K per collar for about 10 moths.

With GOOG at 457ish there's no risk of losing money and you make about 20 pts.if GOOG ends over 480. I know, big deal, but interest rates are very low. Under 460 you get nothing for your investment.

I'm assuming this is a collar and not a synthetic short futures. by selling the 480 and buying the 460 for 2 points, goog would have to be around 470. everything under 470 would be a loss at expiration.

 

[riskfreetrading]

Quote from Prevail:

I'm assuming this is a collar and not a synthetic short futures. by selling the 480 and buying the 460 for 2 points, goog would have to be around 470. everything under 470 would be a loss at expiration.

I have not checked the numbers of Donnap, but assuming they are correct, what I understand Donnap saying is this:

1. Put-Call can be done for 2 points debit.
2. GOOG at 457ish.

The above means that the cost basis is somewhere between 459 and 460. The put guarantees that you sell at no less than 460, therefore no losses under any scenario (if goog is less than 460, you excercise the 460 put). Gains happen if GOOG is above 460, but they are capped when GOOG is at 480 and above. Therefore max profit is 20 pts for this expiration, and the loss of capital is zero.

20 pts is for 3.5 months.For a year (without compounding) this corresponds to around 69 pts, or around 15%.

Therefore, if above numbers are correct, one can one can obtain a return higher than the short term rate, with a guarantee of no loss of capital. However the return is a best case (of course there is no guarantee to get that return) but there is a guarantee of no capital loss. I bet that a majority of people would be surprised that this can be the case. Note that this has nothing to do with no arbitrage (no arbitrage means and implies different things).

 

[Prevail]

I briefly ran the numbers and the basic idea is correct. Buying the put closer than the call will result in some kind of debit. Low risk, low return.

 

[riskfreetrading]

Quote from Prevail:

I briefly ran the numbers and the basic idea is correct. Buying the put closer than the call will result in some kind of debit. Low risk, low return.

Is it possible to be a little bit more precise in your meaning of the words "low risk"? Does the expression "low risk" include or exclude the case of no loss of capital as donnap explained earlier?

 

[IV_Trader]

Quote from riskfreetrading:

I have not checked the numbers of Donnap, but assuming they are correct, what I understand Donnap saying is this:

1. Put-Call can be done for 2 points debit.
2. GOOG at 457ish.

The above means that the cost basis is somewhere between 459 and 460. The put guarantees that you sell at no less than 460, therefore no losses under any scenario (if goog is less than 460, you excercise the 460 put). Gains happen if GOOG is above 460, but they are capped when GOOG is at 480 and above. Therefore max profit is 20 pts for this expiration, and the loss of capital is zero.

20 pts is for 3.5 months.For a year (without compounding) this corresponds to around 69 pts, or around 15%.

Therefore, if above numbers are correct, one can one can obtain a return higher than the short term rate, with a guarantee of no loss of capital. However the return is a best case (of course there is no guarantee to get that return) but there is a guarantee of no capital loss. I bet that a majority of people would be surprised that this can be the case. Note that this has nothing to do with no arbitrage (no arbitrage means and implies different things).

Riskfree , you are one hard working dude , lol , I’ll give you that.
Just drop “arbitrage” and “risk free” words from your posts and we’ll be OK.
Go get ‘em

 

[turkeyneck]

Quote from donnap:

Look at GOOG Jan '09 options. Selling the 480C and buying the 460P can be done for a small debit, say 2 pts at fair prices. The investment would be nearly 46K per collar for about 10 moths.

With GOOG at 457ish there's no risk of losing money and you make about 20 pts.if GOOG ends over 480.

How do you make money when GOOG ends over 480? You are SHORT the 480C and long the worthless 460P. If GOOG ends at 500, the 480C will be 20pts ITM.

 

[riskfreetrading]

Quote from turkeyneck:

How do you make money when GOOG ends over 480? You are SHORT the 480C and long the worthless 460P. If GOOG ends at 500, the 480C will be 20pts ITM.

You do not make money over 480. The gains stop at 480. So reward is limited to 20pts. call will be ITM, but you own GOOG, the stock that is (in addition to the put).

 

[turkeyneck]

Quote from riskfreetrading:

You do not make money over 480. The gains stop at 480. So reward is limited to 20pts.

So the 480C is CC