Short Delta Neutral
- Thread starter daniel_m
- Start date
I might be missing something but my interpretation is:
Whenever you are long the underlying; short the call and long the put: This si a conversion. ALL THE SAME STRIKE! Totally Neutral all Greeks!
If you are short the underlying, long the call and short the put: This is a Reversal. ALL THE SAME STRIKE! Totally Neutral all Greeks!
I think you guys are referring to an upside downside reversal?
I agree with that definition...
but always thought you need the ITM to capture the arbitrage differential... that is 'lock' it up. Not an expert on this on any large scale here. Usuallly leg into many strategy positions; thereby assuming more risk for short periods. Some times it works great sometimes I gotta say "What the phck"! guess it's University of Illinois"!
I
Sorry about the misunderstanding, but I was stuck in the understanding of Put/Call parity. If a Deep In the money call has 5 tics extrinsic value, then the the same strike put is worth 5 tics.
It isn't the total premium that is important, it is the amount of Extrinsic Value that can erode. Basically, the Time value of an ITM Put is the same as the OTM call that is the same strike. Put/Cal, parity will keep this in line!
I spent a long time in the Pits trying to lock in a tic to do a conversion or reversal and I think that I am getting rusty with my theory
You guys are scaring me. I think I need to brush up a bit. It's been 2 years since I looked at an Options screen and made a market. Getting old!
It isn't the total premium that is important, it is the amount of Extrinsic Value that can erode. Basically, the Time value of an ITM Put is the same as the OTM call that is the same strike. Put/Cal, parity will keep this in line!
I spent a long time in the Pits trying to lock in a tic to do a conversion or reversal and I think that I am getting rusty with my theory
You guys are scaring me. I think I need to brush up a bit. It's been 2 years since I looked at an Options screen and made a market. Getting old!
Lobster wrote:
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.
Yes
Iceman wrote:
never worked for a mm group but I thought it's selling an itm CALL? Not put.
Am I missing something here.
Long ITM put, long stock, than short call for a conversion, Long ITM call, short stock, than short put for reversal.
Riskless wrote:
Sorry about the misunderstanding, but I was stuck in the understanding of Put/Call parity. If a Deep In the money call has 5 tics extrinsic value, then the the same strike put is worth 5 tics.
It isn't the total premium that is important, it is the amount of Extrinsic Value that can erode. Basically, the Time value of an ITM Put is the same as the OTM call that is the same strike. Put/Cal, parity will keep this in line!
In the example long stock and long ITM put, your risk is set at the premium paid for the put. The stock can go to zero or the moon, you can't lose more than the premium paid for the put. The conversion or reversal is a function of your opinion of the stocks direction. You probably can't off the floor put on this position all at once, however as mentioned before, if you are a good stock picker you buy the put, long stock,(conversion)and sell the same strike call as the stock price has risen to lock in your profit.
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.
Yes
Iceman wrote:
never worked for a mm group but I thought it's selling an itm CALL? Not put.
Am I missing something here.
Long ITM put, long stock, than short call for a conversion, Long ITM call, short stock, than short put for reversal.
Riskless wrote:
Sorry about the misunderstanding, but I was stuck in the understanding of Put/Call parity. If a Deep In the money call has 5 tics extrinsic value, then the the same strike put is worth 5 tics.
It isn't the total premium that is important, it is the amount of Extrinsic Value that can erode. Basically, the Time value of an ITM Put is the same as the OTM call that is the same strike. Put/Cal, parity will keep this in line!
In the example long stock and long ITM put, your risk is set at the premium paid for the put. The stock can go to zero or the moon, you can't lose more than the premium paid for the put. The conversion or reversal is a function of your opinion of the stocks direction. You probably can't off the floor put on this position all at once, however as mentioned before, if you are a good stock picker you buy the put, long stock,(conversion)and sell the same strike call as the stock price has risen to lock in your profit.
Iceman,
Long ABC at 60, Long March 65 put 5.75. Your risk is .75 no matter where ABC is at expiry. At 50 you exercise your put and sell for 65= .75 risk, the premium paid. Ten days from now ABC at 65, the March 65 call is 1.75, you sell and lock in 1.00. If thereafter ABC goes to 75 you are assigned and deliver your stock, at 50 you exercize your put. You keep the 1.75 you sold the call for, -.75 paid for the put. The sold call premium is yours no matter at 50 or 75. I know I know the prices might not add up, just trying to explain a theory.
There are some other things you can do with this position, which makes options have options.
K
but a conversion (arbitrage) would be like this:
long a 10000 shares of ABC @ 60... {short} 100 55 calls @ 6.50, {long} 100 55 puts @ 1. At exp... no matter whether ABC above or below 55... you're locked into 1/2 point per share (less any div/carry)
That is what I was taught was a conversion... a 'locked' in return.
One can play around with it but not sure that is part of the "true" strategy. Thought you try to construct a riskless strategy (arbitrage) with limited but fixed (calculable) return. No?
But I understand what you're getting at seeking to hedge risk and playing with the underlying within the framework of a strategy and adjusting same thereafter.
Regards,
I
p.s. owe you a pm
