Short Delta Neutral

D

daniel_m

a conversion is delta neutral, right?

constructed by going long stock, long put, short call, yes?

is it possible to also do it by going short stock, short put, long call?

i imagine it would be.

in that case, if you have access to pro leverage, wouldn't it be possible to put on a massive delta neutral short position, say a few millions $, and just collect the short interest?
 
Quote from daniel_m:

is it possible to also do it by going short stock, short put, long call?
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I believe that is a reversal. You will have a haircut on your position though.
 
Are you getting a higher interest rate on the short cash than you're paying to be short the stock?

BTW - be sure you don't confuse delta neutral with risk neutral. In the case of the positions you cite, they can be both risk and delta neutral, but a merely delta neutral position could still go sharply against you.
 
It is suppsed to be risk neutral, however it could still cause an unexpected loss if the puts get excersized. Whether its a reversal or a conversion, they are difficult to put on off floor for edge. I think Metooxx tries to get his traders to do this. Obviously there is a spread between credit/debit rates which run about 100 basis points right now. I think equity credit rates are higher than cash credit rates. Can't say as I already deleted my daily email.
 
You have to be a mighty good stock picker to make a conversion/reversal work without having the benefits of being on the floor.

If you thought XYZ was going up, you buy the stock and an ITM put first, risking the premium you paid for the put, looking to turn it into a conversion. You can pay a very low premium with a deep ITM put, but with less odds of being able to sell the call at that strike. And if you were a good stock picker with a high %, there are better ways to profit.
 
Patefern,

I think you mean an OTM (out of the Money Put first) If it is deep in the money, it will be very expensive. Basically, in order to do the trade you suggest, it would make sense to buy a Put with a Delta of .20 or less.

If the you close the hedge and create a Conversion, you will have pin risk near expiration. Not an ideal situation for some one not experienced in Options.

Alot of my friends that trades stocks put on Conversions, because they are always long stock, thus allowing them to avoid the uptick rule. It can be cheaper than other alternatives if it is legged effectively.

Riskless


Quote from patefern:

You have to be a mighty good stock picker to make a conversion/reversal work without having the benefits of being on the floor.

If you thought XYZ was going up, you buy the stock and an ITM put first, risking the premium you paid for the put, looking to turn it into a conversion. You can pay a very low premium with a deep ITM put, but with less odds of being able to sell the call at that strike. And if you were a good stock picker with a high %, there are better ways to profit.
More...
 
Quote from riskless:

Patefern,

I think you mean an OTM (out of the Money Put first) If it is deep in the money, it will be very expensive. Basically, in order to do the trade you suggest, it would make sense to buy a Put with a Delta of .20 or less.

If the you close the hedge and create a Conversion, you will have pin risk near expiration. Not an ideal situation for some one not experienced in Options.

Alot of my friends that trades stocks put on Conversions, because they are always long stock, thus allowing them to avoid the uptick rule. It can be cheaper than other alternatives if it is legged effectively.

Riskless
More...

Riskless,
To turn the long stock, long put into a conversion you need to be long an ITM put, more intrinsic value and less premium. The OTM put is all premium. The premium you pay on the ITM put is your risk, which will be less risk than the OTM put. Anything you sell the same strike call for over the cost of the put is a locked in profit.

If there is pin risk on expiry, buy back the short calls, for which you have an obligation, can't cost that much if close to strike last day. You have until 4:30 that day to decide if you want to exercise the puts, for which you have the right.
 
Quote from daniel_m:

in that case, if you have access to pro leverage, wouldn't it be possible to put on a massive delta neutral short position, say a few millions $, and just collect the short interest?
More...

Check the quotes, you will find that this exact scenario has already been factored in by the markets: Market value of short put plus long call is exactly market value of stock plus interest difference for the time until expiration.

Well, not exactly. It's usually a little more or a little less. I am speculating that's how people like metoxx make their money.
 
Patefern,

If that is what you believe that is fine. I spent 11 years trading Fixed Income Options for one of the most prestigious options market making groups and all I can say is be careful.

Riskless

Quote from patefern:



Riskless,
To turn the long stock, long put into a conversion you need to be long an ITM put, more intrinsic value and less premium. The OTM put is all premium. The premium you pay on the ITM put is your risk, which will be less risk than the OTM put. Anything you sell the same strike call for over the cost of the put is a locked in profit.

If there is pin risk on expiry, buy back the short calls, for which you have an obligation, can't cost that much if close to strike last day. You have until 4:30 that day to decide if you want to exercise the puts, for which you have the right.
More...
 
Quote from riskless:

Patefern,

If that is what you believe that is fine. I spent 11 years trading Fixed Income Options for one of the most prestigious options market making groups and all I can say is be careful.

Riskless
More...

never worked for a mm group but I thought it's selling an itm CALL? Not put.

Am I missing something here.
 
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