please help decipher this strategy

[xtraderx]

Quote from Maverick74:

Because they earn the spread on the DITM calls thats why. Those spreads are really sweet. Nice and wide. They don't earn the spread by buying stock. If they don't get exercised they will hold their long stock till expiration and have the short calls exercised at expiration which will sell their long stock.

BTW, this is not a good play for guys off the floor because you are paying the spread and they are earning the spread. I know that is obvious to most on here but it doesn't hurt to mention it again.

gotcha, i kind of assumed right away this strategy would be difficult for a retail trader to replicate, and was mostly utilized by floor or mm... what are teh chances of getting hit on an attractive ditm retail bid.
i also imagine a floor/mm may not be buying ditm calls jsut for this strategy per se, but when ex div arrives depending on where they are at and what their inventory looks like, in otherwords its just another option for them..

 

[Maverick74]

Quote from xtraderx:

gotcha, i kind of assumed right away this strategy would be difficult for a retail trader to replicate, and was mostly utilized by floor or mm... what are teh chances of getting hit on an attractive ditm retail bid.
i also imagine a floor/mm may not be buying ditm calls jsut for this strategy per se, but when ex div arrives depending on where they are at and what their inventory looks like, in otherwords its just another option for them..

Well let me give you a typical scenario ok. Stock XYZ is at $50 a share right. And a lot of people buy ATM calls or maybe 55 calls. Well the stock makes a huge move, possibly on a gap up so now it's at $70 a share. Well there are a lot of idiots out there that will jump up and down and get excited and quickly sell their calls to lock in their profits. So now they are DITM calls right. So they sell them to the MM paying a .70 spread or something, they don't care they bought these calls for 2 pts and they are now trading for 23 pts so they are happy. Meanwhile the MM's scoop these up and try to arb them against DITM short calls. Now, where are they doing to get these you might ask? Ahh, from the same idiots that were short naked calls who now have to buy them back so the MM now sells them these calls for a nice .60 spread lets say and the arb is now complete.

 

[xtraderx]

Quote from Maverick74:

Yes it is but since they are short DITM calls unless the stock gaps down huge which I guess it could they are essentially flat stock. If you are short a DITM call its like being short stock. So they are long stock against short stock so thereby not having much risk. The risk they do have is if the stock gaps down 20 dollars and no they longer have a DITM call but rather an OTM call which will not hedge their long stock. Do you follow? The idea here is not to hit a homerun, it's just to capture the dividend. You see that right?

yeah... just trying to capture the div with little to no risk, but its difficult to do off floor or esp in a retail account esp w/ higher fees b/v you rmargins are so slim..

is this strategy employed by the "real" options prop firms in chicago area?

 

[Maverick74]

Quote from xtraderx:

yeah... just trying to capture the div with little to no risk, but its difficult to do off floor or esp in a retail account esp w/ higher fees b/v you rmargins are so slim..

is this strategy employed by the "real" options prop firms in chicago area?

You really can't do this off the floor because the spread you pay will equal the dividend.

 

[nitro]

Don't do this strategy on MO unless you _know_ what you are getting into.

I know of two traders that lost $44,000 _intraday_ (let alone overnight) going long MO (notice that the delta of long MO _stock_ is 100) with size when the stock gapped down 10 points with no bids in between when one of those "annoncements" came out of the blue in the middle of the day.

Before you sell a naked short put overnight, look carefully at the history of the stock, and if you can stomach that, then full speed ahead.

Traders take risk all the time, just be aware what your position really is and the characteristics of the underlying.

nitro

 

[Maverick74]

Quote from nitro:

Don't do this strategy on MO unless you _know_ what you are getting into.

I know of two traders that lost $44,000 _intraday_ (let alone overnight) going long MO (notice that the delta of long MO _stock_ is 100) with size when the stock gapped down 10 points with no bids in between when one of those "announcements" came out of the blue in the middle of the day.

Before you sell a naked short put overnight, look carefully at the history of the stock, and if you can stomach that, then full speed ahead.

Traders take risk all the time, just be aware what your position really is and the characteristics of the underlying.

nitro

Nitro that is a good point. Of course a lot of strategies have gap risk. As far as MO goes, I would avoid all stocks that gap from time to time i.e. biotech stocks, drug stocks, or any of the really violent stocks. However, like I said before, this strategy is for floor traders and most floor traders know which stocks to do this on and which stocks not to.

I said this before and I'll say it again, this strategy is really not that effective any more because most everyone will exercise their long calls ex-div if the delta is near 100. It's hard to catch people sleeping. Ten years ago this was not the case. However some traders are willing to do these trades in size hoping that maybe 5% to 10% of the calls go un-excercised. If they do, like I said, it's free money.

But like all strategies, there is no truly risk free play. Even conversions and reversals carry a tremendous amount of risk. Smart traders understand risk and are able to make good judgement calls when the risk is acceptable and when it is not.

 

[nitro]

Maverick,

I know you know, but 90% or more of them people that ask these questions here often overlook "little" things that can blow their entire accounts out in a split second.

There are bold traders on Wall Street, and there are old traders on Wall Street, but there are no old bold traders on Wall Street [btw, the fine line between being bold and disaster is what makes a trader great.]

nitro

Quote from Maverick74:

Nitro that is a good point. Of course a lot of strategies have gap risk. As far as MO goes, I would avoid all stocks that gap from time to time i.e. biotech stocks, drug stocks, or any of the really violent stocks. However, like I said before, this strategy is for floor traders and most floor traders know which stocks to do this on and which stocks not to.

I said this before and I'll say it again, this strategy is really not that effective any more because most everyone will exercise their long calls ex-div if the delta is near 100. It's hard to catch people sleeping. Ten years ago this was not the case. However some traders are willing to do these trades in size hoping that maybe 5% to 10% of the calls go un-excercised. If they do, like I said, it's free money.

But like all strategies, there is no truly risk free play. Even conversions and reversals carry a tremendous amount of risk. Smart traders understand risk and are able to make good judgement calls when the risk is acceptable and when it is not.

 

[xtraderx]

Quote from Maverick74:

Nitro that is a good point. Of course a lot of strategies have gap risk. As far as MO goes, I would avoid all stocks that gap from time to time i.e. biotech stocks, drug stocks, or any of the really violent stocks. However, like I said before, this strategy is for floor traders and most floor traders know which stocks to do this on and which stocks not to.

I said this before and I'll say it again, this strategy is really not that effective any more because most everyone will exercise their long calls ex-div if the delta is near 100. It's hard to catch people sleeping. Ten years ago this was not the case. However some traders are willing to do these trades in size hoping that maybe 5% to 10% of the calls go un-excercised. If they do, like I said, it's free money.

But like all strategies, there is no truly risk free play. Even conversions and reversals carry a tremendous amount of risk. Smart traders understand risk and are able to make good judgement calls when the risk is acceptable and when it is not.

yeah, my understanding with what they were doing was serious size and just hoping for maybe 5% doesnt get assigned... nitro, thanks for the input and thats def something to take into account before entering a trade... with MO, that jsut happend to be the example tehy were using, and most of these were being done on about that size div, i.e. gm, bac, etc...

thanks for the help guys.

 

[CalTrader]

Quote from nitro:


Before you sell a naked short put overnight, look carefully at the history of the stock, and if you can stomach that, then full speed ahead.

Traders take risk all the time, just be aware what your position really is and the characteristics of the underlying.

nitro

Good advice. You'd better be in touch with the history and characteristics of the issue before you attempt this type of strategy - in fact this is simply not allowed under our compliance systems and would require signoffs before it would be approved.

 

[xtraderx]

hey mav, or anyone, are there any issues whose options trade with tighter spreads... i tried various div plays with various options, i.e. the covered writes, conversions, etc... and did find as you stated, the spread is generally large enough to erase any div gain... anyone willing to share other strategies for div plays other than previosly mentioned