Risk-free arbitrage - not!

[dmo]

Lessons learned moving from options on futures to options on stock:

A few days ago I noticed that you could do a reversal - a risk-free arbitrage - on USO. You could hit the bid on the ATM puts, hit the bid on the stock, and lift the offer on the calls for a very nice locked-in profit.

I couldn't believe it. I went over it and over it. It seemed impossible, but there it was.

This morning when I tried to execute it, I found the problem. You can't short the stock! Impossible to borrow.

In futures of course, for every long there's a short. So there's no such thing as "can't short the underlying." One more thing to get used to.

 

[El OchoCinco]

The other thing to get used to is the fact that a risk-free arbitrage is not just going to sit there all day for you as the market makers give away money.

I think anytime you see a risk-free arb as a retail trader you know you missed a step or did something wrong.

 

[Bob111]

You can't short the stock! Impossible to borrow.

http://individuals.interactivebroke...cntry=usa&tag=United+States&ib_entity=llc&ln=

Symbol: USO
Availability: >10'000'000
Exchanges: AMEX, ARCA, ATD, BATS, CBSX, CSFBALGO, DARK1, DBALGO, DRCTEDGE, EDGEA, IDEAL, ISE, ISLAND, LAVA, NASDAQQ, NITEECN, NSX, TRACKECN, MIBSX, IBSX

 

[atticus]

Hard to borrow reversals are everywhere. The last sizable arb I've seen was in TASR wtih the stock in the 90s and risk-free rates at 5%. That was a 4-handle arb in the front month.

They're driven by the lack of short-inventory. The puts are in demand with little to no capacity to arbitrage.

 

[xflat2186]

Quote from optioncoach:

The other thing to get used to is the fact that a risk-free arbitrage is not just going to sit there all day for you as the market makers give away money.

I think anytime you see a risk-free arb as a retail trader you know you missed a step or did something wrong.

Thats the best advice you can get as a retail trader concerning risk free arbs.