Powerful SPX options arb with $9K instant profit and a free hedge

[guru]

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I don't know man, this is the March'22 SPX implied forward for a range of strikes. It's tight enough for me not to worry about whether or not the market is using a dynamic dividend assumption.

Cool, I get similar/static value with basic calc: Strike + Call Price - Put Price.
But I remember not getting static dividend %yield at different strikes and that's when I found other people having similar issues and all kinds of explanations. But now I just re-checked and it seems to come out quite static and reasonable at different strikes, as ~1.44% yield, with 0.59% risk free rate. Please correct me if you're getting completely different results
I didn't even want to deal with dividend-paying stuff, but may take another stab now.

 

[taowave]

I havent looked at SPX futures/fowards in years,and definetly not in this rate enviorment..

From a market makers perspective, all I needed to know is where the embedded calendar traded.

Now that you pointed out the calendar discount/backward pricing ,it makes a bit more sense that the "fly" was priced around 18.10...Something wasn't adding up,and now I know

No, I'm not in it. Just showing an extreme example of ToS using single SPX price for all expirations, and charting wrong P&L for those options. SPX gets cheaper with time due to lack of dividends that SPY gets, so you can buy a DITM LEAP option on SPX for less than near-term expiry. Basically a Calendar for negative price, even when buying it at the ask:
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Similar to what happens with VIX options, but it's more difficult to see that on SPX options that everyone treats as equivalent to SPY.

 

[guru]

You are again throwing the kitchen sink at the question of "how to calculate a forward price". Explain to me exactly how (1) variance in dividend expectations, (2) IV structure of underlying, (3) borrow costs, (4) and "other factors", impacts the determination of the SPX forward? Because I'm pretty sure none of these are relevant.

Hey, don't want to bother you too much, but just trying to get to the root of the matter, as I am still seeing that the borrow costs seem relevant, while it may be to everyone's benefit to understand details of options' pricing.
So I'm comparing the implied dividend %yield of SPX vs SPY, and they both show the yield as 1.44%. But I think it is common knowledge that SPY options would include borrow costs, so if the total of %yield + borrow costs is 1.44% for SPY, then why the same 1.44% number for SPX wouldn't include borrow costs?
And here is how/why I'm making assumption that the 1.44% for SPY includes borrow costs:
a) https://quant.stackexchange.com/questions/30901/implied-dividend-from-american-options-in-practice :

(this is for American options meaning SPY, but again, I'm seeing SPX options show the same %yield)

b) I extracted %yield for non-dividend paying ETF like VXX and it shows as ~3%. But since it doesn't pay dividends then it must be pure borrow cost (and maybe some other factors?) I did this just to confirm that "something" beyond dividends is relevant for non-dividend paying instruments, and by extension should mater to SPY as well, and by further extension may also matter to SPX. (?)

I understand things should be different for American vs European/index options, but when they both show the same %yield (SPX & SPY) then I'd assume they both include the same variables, and one of them would be borrow cost if it is indeed used in pricing SPY options?

Though there is one caveat as well: I get variable/different %yield for SPY at different strikes, while a single/static %yield for SPX at different strikes. For SPY I get the same 1.44% yield as for SPX derived from ATM options, but SPY shows only 0.95% dividend at 300-strike, for example. This may be another topic.
Of course I may be doing something wrong as well.

 

[AKJ]

What exactly is the concept of a "borrow cost" when the underlying is a non-tradeable index?

Similar to what happens with VIX options, but it's more difficult to see that on SPX options that everyone treats as equivalent to SPY.

I do not know any serious traders who treat SPX and SPY options as equivalent. American options on a tradeable underlying that pays dividends are very different than European options on a non-tradeable index. These differences are especially obvious when you start searching for arbs up and down the curve, as is clear you spend a good deal of time doing based on the recent threads you have started. Taking an American-options mindset and applying it to European options will have you finding free-money arbs where there are none.

 

[guru]

What exactly is the concept of a "borrow cost" when the underlying is a non-tradeable index?

I don't know, just trying to figure out why SPX %yield = SPY %yield, where SPY supposedly includes borrow costs while SPX wouldn’t.
What if I buy SPX index using synthetics (call minus put) vs buying SPY using synthetics? Why would I be able to avoid borrow costs on one vs the other?

I do not know any serious traders who treat SPX and SPY options as equivalent. American options on a tradeable underlying that pays dividends are very different than European options on a non-tradeable index. These differences are especially obvious when you start searching for arbs up and down the curve, as is clear you spend a good deal of time doing based on the recent threads you have started. Taking an American-options mindset and applying it to European options will have you finding free-money arbs where there are none.

You’re assuming I’m oversimplifying this while I’m the one trying to get into details. While you’re oversimplifying it to the point of not wanting to look into details

And I may be the only person who actually posted a real arb here a few years ago, and then I was called an idiot for disclosing that arb:
https://www.elitetrader.com/et/threads/small-options-arbitrage-on-amzn.329406/

So posting real arbs is stupid while posting fake arbs makes me look stupid. I’m aware of this and just having fun.
I’m not even looking for arbs anymore, just posting interesting stuff that I spot, and here I wanted to show how SPX isn’t equivalent to SPY, which you confirmed as well.
While my friendly argument was about whether implied dividends on SPX are purely dividends. And I honestly don’t know, while you seem to know, so I wanted to get into details. Professionalism is all about details, and I strive to understand them.
The fact that SPX isn’t equivalent to SPY is the exact reason why I am still curious why the implied dividend seems the same between them, even though they’re supposed to work differently. And SPY’s implied dividend supposedly includes borrow costs.
You can “buy” SPX using synthetic long just like you can buy SPY synthetically, so I suspect that borrow costs may exist for both. I have no idea whether that’s true, but you pointed out that I’m wrong so from professional standpoint I’d like to see a proof. While your proof was only that professionals “don’t treat SPX and SPY options as equivalent”.
Ok then, thanks

 

[AKJ]

Suppose you own SPY and are trying to come up with a forward sales price that you want to lock in so that you generate the risk free rate between today and the forward sales date. What lending income will you build in to your forward price?

I can tell you that the lending income I would build in for SPY is exactly zero.

I have no idea where you are getting your SPY and SPX dividend yields, but the fact that you are seeing the same number for both does not surprise me.