Retail Alternatives to Bullets.
- Thread starter chasinfla
- Start date
I'm not an expert on bullets, but it seems from what I have gathered that a call is sold, a put is bought, and stock is bought long, but all at the same time with special order entry tools. At least that is what I am going on, correct me if I am wrong.
So, a retail person could theoretically create the same position. I imagine you would buy the stock, buy the put and sell the call in 3 different trades. The problem with that is that if the stock is dropping fast, your fills on the options will really suck. the long put will be really expensive and you won't get diddly for the call you are selling. That will also cause the balance of your delta's to be all out of whack. To really do it right I would think you would need nearly simultaneous fills.
The thing is I don't see why a retail firm would not be allowed to offer it. My options broker allows me to enter a straddle position as one order. I can then sell it with one order just like if it was a single position.
So, a retail person could theoretically create the same position. I imagine you would buy the stock, buy the put and sell the call in 3 different trades. The problem with that is that if the stock is dropping fast, your fills on the options will really suck. the long put will be really expensive and you won't get diddly for the call you are selling. That will also cause the balance of your delta's to be all out of whack. To really do it right I would think you would need nearly simultaneous fills.
The thing is I don't see why a retail firm would not be allowed to offer it. My options broker allows me to enter a straddle position as one order. I can then sell it with one order just like if it was a single position.
Here we go again.
Look, a Bullet is nothing more than long a deep in the money put and long stock. This is an APPROXIMATELY neutral position. If you sell the stock portion of the bullet, you are left with a deep in the money put, whose delta (how "equally" a point in the underlying is reflected in the derivative) is 1 or very close to it, and therefore moves in the stock will result in step by step moves in the option, higher or lower. When you buy back the stock, you are left with a bullet again, but your put option will have gained or lost depending on whether the stock went higher or lower. This gets around the uptick rule since you can sell the stock uptick or no uptick, since you own it! Equally important, while you hold the bullet in tact (long put long stock,) you don't make or lose money, so in effect you have "cocked the trigger" and are ready to "short." Bullets are usually used for one day events, like news stocks, etc.
A conversion adds a short call (same strike same expiration) to the mix so that the time premium paid for the long put is slightly recovered, etc. When you sell the stock, you are left with long put/short call, the equivalent of being synthetically short the stock. Conversions are more time effective for the money, and therefore are used when you know you want to whack the shit out of a stock day in a day out.
Can you do this retail - why not? Just buy the put, and go long the stock, and if you want the full conversion, sell the call? It's just a spread that you can put on yourself!
I did this for EDS - I put on a Conversion - I am with IB. The biggest problem are two fold:
1) IB didn't understand that this spread I legged into was completely risk free, and as the stock plummeted, my margin requirements kept going up until it made my account go below 25K (by their calculations - my "liquidation" value hadn't changed a bit) - now I could NOT daytrade EDS! (I was furious)
2) At a professional firm or at a proprietary firm, getting a hold of one of these things is super fast, it is commission effective by comparison, and the margin requirements are NIL.
My advice, stay away from doing it the way I did it. If someone really comes up with a way of doing it the way they do it at Andover or Bright or Echo for retail traders, I would move my account there in a heartbeat.
nitro
PS - you "guys" really have to learn to use the search in the upper right hand corner of the ET screen - this has been discussed ad-nauseum here. (did I spell that correctly ?
)I think Nitro has given the definitive answer regarding what a "bullet" is.
You can "roll your own" bullet-- you send an order through your broker to the CBOE as a "net debit" order. I.E. buy long stock and buy a long put at a specific price.
For example if GE is 30 and the 30 put is 2.75 bid, offered at 3, you would give the broker a net debit order at $33.
I've used this instead of bullets when the stock is unavailable to short (and thus no firm will sell a bullet as they'd be shorting stock to you).
One additional point of clarification:When you sell the stock you received with the bullet, you are flat, not short. It's only when the put is exercised that you become short. You may be wondering how you become short if there is no uptick. Well, the uptick rule does not apply to the exercise of an option. Additionally, all of these bullet transactions are done OTC at non-listed strike prices.
If you look at "time and sales" after the close you will often see a large trade at a price way outside the market. This is the bullet stock trade being "put up" on the tape at the strike price.
Bullets can be available to retail traders. You must do significant stock volume for a firm to be interested in your account. Say, at least 1 million shares per month as an absolute minumum.
If anyone is interested and can meet the criteria, send me a PM. I'll hook you up.
You can "roll your own" bullet-- you send an order through your broker to the CBOE as a "net debit" order. I.E. buy long stock and buy a long put at a specific price.
For example if GE is 30 and the 30 put is 2.75 bid, offered at 3, you would give the broker a net debit order at $33.
I've used this instead of bullets when the stock is unavailable to short (and thus no firm will sell a bullet as they'd be shorting stock to you).
One additional point of clarification:When you sell the stock you received with the bullet, you are flat, not short. It's only when the put is exercised that you become short. You may be wondering how you become short if there is no uptick. Well, the uptick rule does not apply to the exercise of an option. Additionally, all of these bullet transactions are done OTC at non-listed strike prices.
If you look at "time and sales" after the close you will often see a large trade at a price way outside the market. This is the bullet stock trade being "put up" on the tape at the strike price.
Bullets can be available to retail traders. You must do significant stock volume for a firm to be interested in your account. Say, at least 1 million shares per month as an absolute minumum.
If anyone is interested and can meet the criteria, send me a PM. I'll hook you up.
thanks nitro, that's the best explanation I have heard.
Dude, that was the most gentlemanly rebuke I have ever received here. Your apology is completely unnecessary. I'll store it for when it isn't.
And I'd be furious about that EDS margin thingy, too. These people (firms in general, I don't deal w/IB) are supposed to be professionals, but anything off the menu throws them into a tizzy....It'd be nice to know of some firms that are more realistic.
And I'd be furious about that EDS margin thingy, too. These people (firms in general, I don't deal w/IB) are supposed to be professionals, but anything off the menu throws them into a tizzy....It'd be nice to know of some firms that are more realistic.
Though I understand the theory, what I don't get is how the profits are actually banked on such trades. May have to do with my never having made an options transaction... So I've set up my bullet or conversion, and have sold some stock, then bought it again at a lower price. Meanwhile, my ITM put has appreciated in value, but wouldn't I have to sell it to collect any profit? If so, when? If not, what am I missing - does it have something to do with how options vs. stock are valued within a single account? And why isn't the total transaction affected significantly by slippage and commissions on all the pieces?