Retail Alternatives to Bullets.

[rtharp]

Originally posted by Kymar
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?

Ok I'll chime in

Bullets are fully electronic and done by bullet firms. They usually sell stock out of their own inventory. That deep in the money put option we are talking about is very special. It has a 1 day time premium and expires at the end of the day. There is no slippage as the bullet firms take care of everything.


On conversions there is the floor but we are requesting a conversion with them (a spread) and all the floor traders know exactly what we want and are usually happy to comply. We used to get them for a credit when the options had more liquidity but now it costs us .10 or so on the floor.

When I own a bullet ..or a conversion I hit the sell button instead of the short button. It show -100 or -1000 in my account on my position summary just like as if I hit the short button. When I cover it appears the exact same way.


Look they work....

Trying to understand everything about bullets is just like trying to understand how your TV works.

I turn it on and change channels.

I don't really care about the electronics insides too much. This won't effect your P&L understanding everything about bullets.

If you are with a pro firm you access to them.

If you are retail fat chance. This is one of the reasons I have to pay yearly exchange membership fees and retail traders don't.

Robert

 

[bungrider]

question - if you are retail and trade the same stock all the time, why not just put up a "long-term" bullet - i.e. 200sh of stock, but one deep ITM put (maybe 6 months before expiration), sell one deep ITM call (also 6 mos out).

so you are long 200sh, long 1 ITM put, short 1 ITM call. your margin requirement (at IB) could be roughly zero for the options, if they are roughly the same value when you initiate. this leaves you neutral on the stock, and you are out the spreads on the options (unless you scale and "make the spread").

i would think that paying out $100-200 for the spreads on the options (for every 200sh) would be alot cheaper than buying bullets every day, provided you keep the options for some time.

selling 200sh leaves you short 200, and you can hit bids on downticks.

does this make sense??

 

[chasinfla]

Are there 3rd party providers? Suppose your retail firm doesn't have bullets...can you get them from the bullet guys anyway?

 

[rs7]

Originally posted by rtharp


Trying to understand everything about bullets is just like trying to understand how your TV works.

I turn it on and change channels.

I don't really care about the electronics insides too much. This won't effect your P&L understanding everything about bullets.

Robert

Perfect!!!
Bullets aren't that complicated, but the truth is, as you say, it just doesn't matter.

 

[nitro]

Originally posted by rs7

Perfect!!!
Bullets aren't that complicated, but the truth is, as you say, it just doesn't matter.

I strongly disagree.

A Deep understanding of how derivatives allows one to sidestep the rules gives a deeper understanding of how the markets are pieced together, and keeps you on your toes as new "instruments" are introduced or rules change.

A person driving on the highway does not need to know how a car works, but a race car driver has an exellent understanding of the nuances of his car and the physics of going faster more effeciently. A person flying a kite does not need to know much either to fly a kite, but a fighter pilot needs a degree.

As a professional trader, you can NEVER know "too much" about how the markets are pieced together. Don't let anyone talk you out of it.

nitro

 

[rs7]

Originally posted by nitro


I strongly disagree.

As a professional trader, you can NEVER know "too much" about how the markets are pieced together. Don't let anyone talk you out of it.

nitro

I know you are correct. It is just that for a few years I was a MM on the CBOE and we tried to do as many conversions and reversals as possible. It was really "free money" if you could get a credit. No capital requirement, and no risk.

So to me, bullets seem simple. Yet I have worked with many daytraders that knew just enough about options to get through the series 7. After that, options became irrelevant. And it affected their trading in no manner whatsoever.

So yes, there is no such thing as "too much" knowledge. But if the knowledge is not relevant, or not of interest, than there is no sense struggling with it.

Your race car driver analogy is well stated. But still, I would not necessarily want a driver designing my car. Nor would I want the designer driving it. (If I was a race car owner).

My son wants to fly F-18's. But his route to his objective is to go to Nuclear school. This won't apply much to flying. He could have been an avionics tech and been working on the airplanes (even flying them...just not landing and taking off...sounds ominously familiar somehow). But this would have taken him on a longer journey to his ultimate goal. So apparently the Navy has the impression it is more important for him to "learn how to learn" than to learn any specific subject just for it's sole application.

Those that want to know will learn. It just isn't necessary for everyone to know the derivatives markets or really to focus on more than one thing as a new trader. Why confuse issues? Some of the very best day traders I ever knew didn't know squat about any of the other markets. And some of the most knowledgeable traders, with unbelievable credentials came off the trading floors and couldn't get themselves arrested day trading stocks.

 

[nitro]

... to "learn how to learn" than to learn any specific subject just for it's sole application.

This is perhaps EVEN more important than the knowledge itself.

nitro

 

[lescor]

I'll relate a story I heard of a trader at one of the popular pro firms. He was the biggest dude there and traded massive amounts of volume and put up tons of bullets. He thought that might entitle him to a discount on what he was paying for them. The firm said no way, so he went directly to the bullet firm and negotiated his own deal and set up an account with them.

So I guess you can do it, but you've got to be a big dude trader.

Originally posted by chasinfla
Are there 3rd party providers? Suppose your retail firm doesn't have bullets...can you get them from the bullet guys anyway?

 

[larrybf]

NITRO: THANK YOU. after reading about the super mysterious bullets for over a year, not only did someone actually explain what is was but you went further and told how an "at home" trader (non-pro) could actually utilize it. THANKS AGAIN

 

[dgabriel]

What cost can one expect in terms of slippage when putting on a bullet? It seems that when you put on the bullet, you market buy everthing, and at the end of the day you perhaps reverse the procedure. So you lose the spread x 4. I suppose this is of consequence mainly for the options.