Options Arbitrage

[Robert Morse]

Today I was thinking, If I bought a delta 1.0 Call, sold an OTM call.(bull debit vertical) At at the same buy a 1.0 delta Put, sold an OTM put, (put debit vertical), I end up with a risk free trade and collect the premium for both short contracts... I did the risk analysis in TOS and I'm seeing a horizontal line above zero, with a profit of 4.29.... or 10% in 10 days with this particular spread, "risk free"....

After doing some digging, I learned this is called a box spread. I also saw some info on reversals. Can any knowledgable traders share their insight with these strategies, and maybe what I am missing? This obviously sounds too good to be true. Really appreciate the responses.

Reversal/conversions and box spreads are "non-risk" (Not always) spreads and not really a retail strategy but understanding them with put/call parity are a good learning tool to better understand option markets.

 

[gkishot]

Today I was thinking, If I bought a delta 1.0 Call, sold an OTM call.(bull debit vertical) At at the same buy a 1.0 delta Put, sold an OTM put, (put debit vertical), I end up with a risk free trade and collect the premium for both short contracts... I did the risk analysis in TOS and I'm seeing a horizontal line above zero, with a profit of 4.29.... or 10% in 10 days with this particular spread, "risk free"....

After doing some digging, I learned this is called a box spread. I also saw some info on reversals. Can any knowledgable traders share their insight with these strategies, and maybe what I am missing? This obviously sounds too good to be true. Really appreciate the responses.

Can you put out a screen shot of TOS analysis of this particular stock?

 

[Robert Morse]

Assuming that long call & long put cancel each other out, you seem to be ending up with a short strangle.

He said buying, so it would be long not short.

 

[gkishot]

He said buying, so it would be long not short.

If understood him correctly, he said buying 1 delta call and -1 delta put, so they should be cancelling each other, leaving him w/ the short side.

 

[Robert Morse]

If understood him correctly, he said buying 1 delta call and -1 delta put, so they should be cancelling each other, leaving him w/ the short side.

" If I bought a delta 1.0 Call, sold an OTM call.(bull debit vertical) At at the same buy a 1.0 delta Put.

IF I just buy an ITM PUT and ITM call that both are a delta of 1, I only profit out side that range. If I then sell a higher strike call and sell a lower strike put, I have a box.

 

[gkishot]

" If I bought a delta 1.0 Call, sold an OTM call.(bull debit vertical) At at the same buy a 1.0 delta Put.

IF I just buy an ITM PUT and ITM call that both are a delta of 1, I only profit out side that range. If I then sell a higher strike call and sell a lower strike put, I have a box.

That's why I am curious what particular stock & what strikes he is talking about when studying its risk profile in TOS.
I would also understand you better if you provide a detailed example.

 

[Robert Morse]

Sure . In his example let's use AAPL. Stock 224.25. This is long an DITM Put and DITM calls and short the worthless other options on that strike. This 50 point box is worth $50 less the cost of carry if there is no dividend and not hard to borrow.

 

[gkishot]

Sure . In his example let's use AAPL. Stock 224.25. This is long an DITM Put and DITM calls and short the worthless other options on that strike. This 50 point box is worth $50 less the cost of carry if there is no dividend and not hard to borrow.

View attachment 192667

TY.

 

[Robert Morse]

Sorry, I did not flip the OTM put to sell. THis is correct,

 

[2rosy]

you basically created a condor. The long put and call (both ITM) is called a stupid