Synthetics

[hajimow]

Quote from riskarb:

If the trades are independent, then yes, it wouldn't be logical to offset the shares and then sell the call; but Hajimow was specific when stating the trade[short spot/short put] should be traded as a combo order. I think he's backpeddling a little.

I admit to my mistake. Selling the stock and selling PUT as a combo order does not make sense. I should have told, sell the stock to cover it with profit and if it goes against you, sell PUT.

Now I have another good trade (I believe it is almost 100% profitable). The trade is to sell Call 32.5 and PUT 35 for TXN as a combo order for the credit of 3.35 or 3.40. $2.5 will be gone if it closes between 32.5 and 35 (that I am betting on it) and 0.85 will be the profit.

 

[riskarb]

Quote from hajimow:

Now I have another good trade (I believe it is almost 100% profitable). The trade is to sell Call 32.5 and PUT 35 for TXN as a combo order for the credit of 3.35 or 3.40. $2.5 will be gone if it closes between 32.5 and 35 (that I am betting on it) and 0.85 will be the profit.

Or in lieu of selling the guts, you could trade the identical position:

Sell the 35.00c
Sell the 32.50p

 

[hajimow]

Quote from riskarb:

guaranteed, almost guaranteed.

Believe what you wish. All done here.

We live in the fuzzy definition of the words
I know in trading nothing is guaranteed. I know you know what I meant by guaranteed.

 

[hajimow]

Quote from riskarb:

Or in lieu of selling the guts, you could trade the identical position:

Sell the 35.00c
Sell the 32.50p

You are absolutely right. Which trade you would prefer? I would go with the one that gives me more profit.

 

[riskarb]

Quote from hajimow:

At 2:30 PM Friday when you could not sell Call 40 at 5 cents while you could sell the stock and PUT and get 40.20 altogether, selling Call will not be like selling the stock and option in profit. Once again just look at the time that I did. Other times, you are right.

From your earlier example:

RMBS: $38.50
Implied cost basis on short: $40.20
Hajimow's recollection of $40 call value: <$.05

This implies the put was trading $.20 over intrinsic. If so, the call must also trade at $.20 to maintain zero-arbitrage. If the call was "<" $.05, you buy call at a nickel, sell put at $1.70 and sell stock at $38.50 to lock the $.15 less comms.

IOW, you're incorrect in your recollection.

 

[cnms2]

hajimow,

I don't want to seem picky, but why sell a "meat" strangle and not a regular strangle? Probably you lose more in slippage and a little interest too. You're guaranteed to have to buy back at least one of the legs (slippage).

I see that you like selling naked options...

Quote from hajimow:

I admit to my mistake. Selling the stock and selling PUT as a combo order does not make sense. I should have told, sell the stock to cover it with profit and if it goes against you, sell PUT.

Now I have another good trade (I believe it is almost 100% profitable). The trade is to sell Call 32.5 and PUT 35 for TXN as a combo order for the credit of 3.35 or 3.40. $2.5 will be gone if it closes between 32.5 and 35 (that I am betting on it) and 0.85 will be the profit.

 

[hajimow]

Quote from riskarb:

From your earlier example:

RMBS: $38.50
Implied cost basis on short: $40.20
Hajimow's recollection of $40 call value: <$.05

This implies the put was trading $.20 over intrinsic. If so, the call must also trade at $.20 to maintain zero-arbitrage. If the call was "<" $.05, you buy call at a nickel, sell put at $1.70 and sell stock at $38.50 to lock the $.15 less comms.

IOW, you're incorrect in your recollection.

I would disagree with you on this. Just imagine it is 2:30 and the stock is at 38.5 and the stock is hovering around 38 and 38.50 in the last hour and all the hopes that it would go over 40 is diminished so Call 40 is dead. 5 cents is ask price and there is no bid. On the other side, you could sell PUt 40 at 1.70. The person who is buying the put at 1.7 is thinking of the stock would go to 38 and his 1.7 would be worth $2. If the stock was trading at 40, your theory that Call and Put should be both at the same price would be correct.

 

[riskarb]

Quote from hajimow:

You are absolutely right. Which trade you would prefer? I would go with the one that gives me more profit.

Hajimow -- you seem like a nice guy, but something is getting lost in the translation. They're identical, equivalent. The short put/short call carries a larger credit, but the strike differential must be subtracted from the premium received to achieve the maximum gain at expiration:

3250p/3500c @ 2.00 = 3250c/3500p @ 4.50

Identical PnL, but the $4.50 creidt has greater assignment risk.

 

[hajimow]

Quote from cnms2:

hajimow,


I see that you like selling naked options...

You are right on that

 

[riskarb]

Quote from hajimow:

I would disagree with you on this. Just imagine it is 2:30 and the stock is at 38.5 and the stock is hovering around 38 and 38.50 in the last hour and all the hopes that it would go over 40 is diminished so Call 40 is dead. 5 cents is ask price and there is no bid. On the other side, you could sell PUt 40 at 1.70. The person who is buying the put at 1.7 is thinking of the stock would go to 38 and his 1.7 would be worth $2. If the stock was trading at 40, your theory that Call and Put should be both at the same price would be correct.

It abrogates the most basic arbitrage, put-call parity and strike-vol equivalence. There isn't any hypothetical scenario which will make it so.

The call must trade at $.20 for put-call parity to exist. The reason the put is trading $.20 over the call is based as much on call demand as put demand in terms of the arb.