Strategy to ride premium down on GRPN puts

Quote from edfor:

I sold 35 boxes at around .75 each, that's 2625 in profit minus around 100 in commission. I only gave up 3 cents on the calls. I can't imagine market makers are going through the trouble of adding liquidity on calls so they can reap a massive 3 cent discount on a long position of a stock they wouldn't want to hold anyway. I'll see how it goes, can't imagine I could lose much, maybe the daily trading range of groupon.

If it happens to drop below 24 quickly and never rise up past there again then I can't possibly lose even if assigned. I think it's worth the risk.
More...

Edfor, believe me I hope you make money, but I want you to understand the risk. Your "risk" here is your short 15 calls, so as long as the stock is above 15 (not 24) you are facing a potential assignment and a forced buyback of your short stock. The only way you will make money here is 1) the stock becomes easier to short before you are assigned and the box value shrinks or 2) you get very lucky on an assignment/ buyback.

If your firm allows you to stay short the stock after you are assigned on the calls, you will be paying a huge short stock charge that will eat up any profits. Of course as I said you may be forced to buy in the short stock if there is none available. You then have to decide whether to resell the calls or take off the whole position.
 
Quote from FSU:

Edfor, believe me I hope you make money, but I want you to understand the risk. Your "risk" here is your short 15 calls, so as long as the stock is above 15 (not 24) you are facing a potential assignment and a forced buyback of your short stock. The only way you will make money here is 1) the stock becomes easier to short before you are assigned and the box value shrinks or 2) you get very lucky on an assignment/ buyback.

If your firm allows you to stay short the stock after you are assigned on the calls, you will be paying a huge short stock charge that will eat up any profits. Of course as I said you may be forced to buy in the short stock if there is none available. You then have to decide whether to resell the calls or take off the whole position.
More...

If the stock drops to 23 lets say, then if I get assigned at any point from then on it doesn't matter, because if I were forced to buy in it would be at a profit. I sold 15 calls for 9 when the stock was at 24. So no matter what I'll get a total $24 when my calls are assigned, so if the stock trades down I don't lose in that scenario.

The big risk is if the stock goes up and gets assigned, but based on these put/call prices that's not what most people expect to happen.
 
Quote from edfor:

If the stock drops to 23 lets say, then if I get assigned at any point from then on it doesn't matter, because if I were forced to buy in it would be at a profit. I sold 15 calls for 9 when the stock was at 24. So no matter what I'll get a total $24 when my calls are assigned, so if the stock trades down I don't lose in that scenario.
More...

Sorry, but this is completely wrong. It is meaningless where you sold those calls. It is part of a packaged spread. The individual prices you traded each option at DONT MATTER.

When you are assigned on the calls, the short stock you have in their place is still a perfect hedge to the position. The problem as I mentioned is you will either pay a huge short stock charge to your firm or you will be forced to buy your short stock in. When you buy it in (or it is bought in for you at an unknown price) you will NO LONGER be hedged. You will have to resell those same calls out again to maintain your original position, and the cycle will continue.
 
Shares not borrowable but borrow rate at IB is 95%
Ouch

2 years ago I had 12,000+ short shares of C via a conversion. Borrow rate was a little over 100% and my delusional idea of scalping those shares intraday went out the window the first day I saw the borrow charges. It was like swimming upstream.
 
Quote from FSU:

Sorry, but this is completely wrong. It is meaningless where you sold those calls. It is part of a packaged spread. The individual prices you traded each option at DONT MATTER.

When you are assigned on the calls, the short stock you have in their place is still a perfect hedge to the position. The problem as I mentioned is you will either pay a huge short stock charge to your firm or you will be forced to buy your short stock in. When you buy it in (or it is bought in for you at an unknown price) you will NO LONGER be hedged. You will have to resell those same calls out again to maintain your original position, and the cycle will continue.
More...

I still don't think it's that bad. It's a risk free 10% profit if held to expiration, in one month. I'll have to wait to see what happens tomorrow. I'm not convinced the market makers are out to arbitrage 3 cents by buying calls below parity, at least not for new options, maybe when we're close to expiration. And they can't short either, so they could only guarantee themselves a profit if they already had the GRPN before buying my calls. I think if I wasn't assigned instantly on that call the odds are pretty good I won't ever be. And if that's the case I'll keep an eye on how much it will cost to unwind the spread as we get closer to expiration and decide if it's worth keeping on.

Too bad it wasn't a debit box spread, then I wouldn't have to worry about being assigned.
 
Quote from edfor:

I'm not convinced the market makers are out to arbitrage 3 cents by buying calls below parity, at least not for new options, maybe when we're close to expiration. And they can't short either, so they could only guarantee themselves a profit if they already had the GRPN before buying my calls. I think if I wasn't assigned instantly on that call the odds are pretty good I won't ever be. And if that's the case I'll keep an eye on how much it will cost to unwind the spread as we get closer to expiration and decide if it's worth keeping on.

Too bad it wasn't a debit box spread, then I wouldn't have to worry about being assigned.
More...

You don't understand. I am not trying to be rude, but I am trying to get you to understand this concept. You think the MM wont exercise the 15 calls because all he has to gain is 3 cents? If he doesn't exercise he will lose 85 cents. He paid 85 cents over for the box. If he does nothing he will lose all that money. He can now take advantage of a reversal by selling any put, selling stock and buying the same strike call or any other spread that allows him to take advantage of the high put prices, but when he does any of these spreads, he will be short stock, so he will exercise your calls to get long stock.
 
Quote from FSU:

You don't understand. I am not trying to be rude, but I am trying to get you to understand this concept. You think the MM wont exercise the 15 calls because all he has to gain is 3 cents? If he doesn't exercise he will lose 85 cents. He paid 85 cents over for the box. If he does nothing he will lose all that money. He can now take advantage of a reversal by selling any put, selling stock and buying the same strike call or any other spread that allows him to take advantage of the high put prices, but when he does any of these spreads, he will be short stock, so he will exercise your calls to get long stock.
More...

Ok, I think I see. So if I get assigned tomorrow I'll have to buy GRPN to cover and I'll basically be out my whole net credit and left with long 23 calls, short 23 puts, and long 15 puts. I can sell sell back my calls for 2.15 or so and turn it into a bull put spread which probably isn't too bad of a position by itself. That half of the box was a $2 net credit so I'd make money if it closed December above 21. Max loss be 6 dollars at 15 or under.

I could sell my 15 puts for a whopping 15 cents or so, probably just enough to cover commissions for the whole lot. This would leave me with a synthetic long with a cost of 23, as compared to the actual cost of 24 at the moment.

Or I could sell my original 23 call, and then enter into a new bear call spread at 23/26 for a 1.25 net credit. This would give me a total net credit of 3.25. So I'd lose 4.75 at 15 or under, break even at 19.75, make a max profit of 3.25 at 23, and start to lose again on the way up, but having a guaranteed profit of .25 on 26 or over.

I think I could live with one of those options if I can't keep a box on. Not sure which one I'll pick, guess it depends on how the assignment process works.
 
I think they are making this more confusing than it has to be, as usual here.

With 100% vig, that short itm call at parity is to good to be true. Why should they let you short this for FREE? huh?

Seems near 100% probability that gets assigned, and you wind up with a short stock position where you pay 100% a year interest.

Speaking of fools, why would anyone be long stock when you can buy the synthetic at a sharp discount?
 
Quote from stock777:

I think they are making this more confusing than it has to be, as usual here.

With 100% vig, that short itm call at parity is to good to be true. Why should they let you short this for FREE? huh?

Seems near 100% probability that gets assigned, and you wind up with a short stock position where you pay 100% a year interest.

Speaking of fools, why would anyone be long stock when you can buy the synthetic at a sharp discount?
More...

Well said
 
You must log in or register to reply here.
Back
Top