Question: Are Conversions/Reversals a viable strategy?

T

TradingDemystified

Hello,

We all know that the options market is usually correctly priced so that no arbitrage (especially by retail traders) will be possible especially in the long run. I came across this situation however and I haven't been able to figure out what is going on. If I initiate a Conversion here (long underlying, short call, long put) it appears that I would be able to ride it out for a riskless profit (which I just know doesn't exist) so I am requesting your help in identifying what is going on with this setup. For all my calculations I am using natural prices (buying at the ask, selling at the bid) so that there's a higher probability of a potential fill.

Underlying: GLD
Underlying Price: 114.33
No dividend
Expiration: 21-Sep-2018 (46 DTE)
Strike: 112
Call Price (Bid): 3.25
Put Price (Ask): 0.62

Conversion would be entered at:
Long Stock: +114.33
Short Call: -3.25
Long Put: +0.62
----------------------------
I would be paying 111.70
For a structure that would be worth 112 at expiration

What am I doing wrong here?

upload_2018-8-6_19-14-1.png


Thanks in advance
 
Robert Morse said:
Assuming before 4pm ET you can buy the GLD for 114.33, nothing I can see. I assume the stock was not offered there and was higher, but hard to tell.
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Fair enough, I just got home so I did it after hours but I have been monitoring the whole week and it's something similar... for that configuration the difference is constant between $0.30 and $0.35 per contract. I will post live numbers during business hours tomorrow but I can assure you they look similar
 
The strike is 112
46 days/360 = .127778 of a year
Cost of carry at 3% is 112*.12778*.03= $0.429333
at 2% it is $0.286222

Seem inline to me. You make $0.30 but miss out on interest at the riskless rate. If I plug in 2.4%, the t-bill rate, that is now= $0.343467
 
You are also financing early exercise risk. That's part of the excess return - you may not care if it's a pure interest rate play
 
ajacobson said:
You are also financing early exercise risk. That's part of the excess return - you may not care if it's a pure interest rate play
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Indeed. If gold starts paying dividends, he'll be in trouble! :D

PS. actually, these ETFs do pay rebates sometimes so it's a real risk
 
Secret Santa said:
Indeed. If gold starts paying dividends, he'll be in trouble! :D
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He's going long stock/short synthetic. He'd benefit if there was a surprise dividend.

Even if it gets called away he benefits because he's being payed $0.30 to finance the position for 46 days but ends up only having to finance it for a fraction of that period.
 
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