Risk Free Challenge!

[Pekelo]

So here it is a collar on TSLA ($338 at the time). Buying the stock and put selling the covered call. It made right away $41 or 0.1% ROI in 3 months! If that is not how you get rich, I don't know how.

Now I want my MTV, er... lollipop, er.. whatever the prize is!

Oh but since I am nice, I will throw in education for free:

"The costless collar, or zero-cost collar, is established by buying a protective put while writing an out-of-the-money covered call with a strike price at which the premium received is equal to the premium of the protective put purchased. Costless Collar Construction. Long 100 Shares."

The trick is to make it more than zero sum, to have the stock a bit above the strike price so the calls are more expensive than the puts. The difference between the calls and puts should be more than the difference between the current stock price and the strike.

 

[Pekelo]

Another one on NFLX. I can do this all day long:

 

[Sig]

And that's why I recommended the risk free rate hurdle!

Pekelo with those kind of returns you're gonna be a billionaire one day....in whatever currency they're using in Venezuela these days at least.

 

[ajacobson]

The trade is not risk less. It's a conversion and subject to pin risk and that's what you are being paid for. Stock pins to the strike at expiration - what do you do ? Hold the stock in case you get an exercise notice ? Sell the stock out and then the risk of an exercise notice.
Trade out of the entire conversion ?

 

[EvanDM]

I assume you are quoting the mid. Have you ever actually been filled at these prices. Markets are more than a $1 wife out that far for NFLX

 

[JackRab]

@Pekelo... that's not a collar but a synthetic stock vs stock... a conversion/reversal. A collar is with different strikes...

So you're basically trading the interest and dividend.

Since you're doing the conversion, selling the call + buying the put and buying the underlying, you're actually long dividend... which is actually the way to do it since both Tesla and Netflix don't pay out a dividend and when they suddenly do before your expiration date, you make a decent profit... (not likely however, since it's Tesla and Netflix... both burning money).

So I give you that...

The risk though, is that you're also short interest... So you potentially shoot yourself in the foot when an interest hike comes up... you've locked in the lower rate. And you've actually locked it at about 0.47% annually... while the 3 month Treasuries yield 1% annually... BAD TRADE on it's own... (.. the reason for that rate to be so low, is probably because of stock lending rates being slightly higher due to large short positions...)

If you would trade the other way, the reversal, you're long interest rate, short dividend... and the main risk would be that since you would be short the underlying stock, you could get screwed when there's a short squeeze and you need to deliver the stock.

Also, with both synthetics... if you keep it until expiry, you have a 'pin-risk', meaning if the stock gets pinned exactly on the strike, which happens, you don't know what position you will have after expiry since you don't know whether you will be assigned in the short call or not. So you could end up long the stock... and... are you going to exercise your long puts? If you will... you might end up short the stock after expiry.

So... in short... while there is limited risk in both reversals and conversions... there are definitely risk.

- Pin-risk on expiry
- Interest rate risk
- Dividend risk
- Short-squeeze risk due to delivery request in case of reversal

NOT RISK FREE

PS, also... with transaction cost you're better of putting your money in a savings account.

@ajacobson good comment! Pinrisk is a bitch... especially if you have a decent size on. We would usually go for 50:50, so we would exercise half the long options and assume the short gets assigned by half as well... but, it's a gamble notheless....

 

[JackRab]

Hahaa... hey @Pekelo... have you actually read your Order Conf Dialog???

I guess if you just ignore all the risks and warnings... then indeed there's no risk!
"can do this all day long"... that's the spirit! You can also just donate your money to me all day long... saves you some time...

 

[Pekelo]

So what did I win?

both Tesla and Netflix don't pay out a dividend and when they suddenly do

Best joke of the decade...

 

[lawrence-lugar]

So what did I win?

Make a killing with those options, Pekelo...Make Trading Great Again,

There's this guy on Youtube that turned $10K into 120K with options -- that could be you if play your cards right,

You need a unique Claim to fame, and then start a Minigun Trading Academy that sells Platinum memberships that look like bullets as links.

And host semi-annual trader parties...complete with karaoke. Johnny Rock and Xela on stage and that Spooz 2 character.
Chinese food everywhere...sponsored by Sweet and Sour Bobby and Karen the Phantom Trader. gelatin lollipops too. and even host $20 laptop raffles.
Buff Baron in attendance in his Hawaiian shirt. Robert Morse in a suit handing out business cards. and that blue pitbull wandering around. and Soes looking like he awoke from a coffin pocketwatch still ticking.

 

[JackRab]

So what did I win?



Best joke of the decade...

You didn't won a thing because you are too ignorant of your own mistakes.

You're so out of your league here Pekelo... it's like you're a 5-year old Put-Put player who is trying to get in the Superbowl...