poopy's risk to arb tutorial

[PoopyDeek]

I'll be updating this thread at the close. Thanks.

 

[taowave]

This ones going to have a happy ending..no pun intended

 

[PoopyDeek]

This ones going to have a happy ending..no pun intended

You're right, crazy return on a naked short for 1W, but illustrative nonetheless.

 

[PoopyDeek]

Short the MSFT Jan 110P/175C for 20.52. Jan fwd = spot. Jan box is $64.5 ($0.50 under strike diff). Example for illustration. Those are the figures you need to look at the opp. There isn't much to add until I cover by converting to the long box.

Jan outside strangle = 12.15 mid (20.52)
Jan inside strangle = 78.40 mid (wide, dubious)

Jan box = 64.9 mid (64.50)

Edge implied box = 57.88 = 7.02 edge

Edge implied cover = 12.15 = 8.37 gained

I'd not buy the box here due to carry. Terminal edge of 7.02. I think the inside could be worked for 78 = 7.42 terminal.

A toss up. Is the deferral worth the edge loss (and loss to microstructure) from buying the inside combo or perhaps holding the outside a bit longer?

I'd hold it here and revisit in another week.

I am not a CPA or tax attorney. I am not recommending anything for your personal tax situation. This thread is purely for entertainment value.