TECS Options Arb

G

guru

This morning I flattened my short options positions in TECS and it seems that I've ended up with an arb.
Due to commissions and slippage I couldn't pull this off as a new trade even if I tried, so I'm posting this just to speculate how market makers may never lose when they build a bunch of positions without slippage (or even profiting from negative slippage).

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Here is copy/paste code that can be pasted into ToS:
BUY +1 28/6/1/1/-27/-3 CUSTOM TECS 100 21 Jan 22/21 Jan 22/17 Jun 22/17 Jun 22/21 Jan 22/17 Jun 22 11/16/11/12/13/13 PUT/CALL/PUT/PUT/PUT/PUT @-60.78 LMT

But this also shows that ToS seems to be inaccurate and showing immediate profit/mispricing that later drops down to about $120.
My own/corrected risk graph shows $0 profit at the current pricing, which then increases via small positive Theta till expiration, though can also act as a hedge for a market crash. The end result (arb) seems similar in both cases.

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@guru , I'm curious: how do you construct these positions? Are you starting with, say, a fly (or some other strat) and then adding spreads to modify the greeks or something? I don't think I've ever seen anyone do this kind of thing before.
 
BlueWaterSailor said:
@guru , I'm curious: how do you construct these positions? Are you starting with, say, a fly (or some other strat) and then adding spreads to modify the greeks or something? I don't think I've ever seen anyone do this kind of thing before.
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This one started pretty simple, as a bunch of TECS puts I bought months ago. Later I was manually maneuvering around by adding some calls as hedges, and maybe added a few more puts as well. Just basic trading with partial hedging. Only today I wanted to close my TECS positions, but used my internal risk management system to show me whether there is a "better way" by selling/buying other options than the ones I have. So my system found whatever I need to buy/sell to flatten my positions with less slippage than closing my previous positions, and still have some hedging potential, basically looking for the best reward-to-risk.
Using IB with their poor tools & GUI forced me to build over the years various internal tools that help me smooth options pricing, maintain my positions, adjust and hedge them. Sometimes finding arbs that aren't practical on their own, but give me various ideas, sometimes leading simply to high reward-to-risk trades, but other times making me lose more than I expected... :)
 
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guru said:
Just basic trading with partial hedging. Only today I wanted to close my TECS positions, but used my internal risk management system to show me whether there is a "better way" by selling/buying other options than the ones I have. So my system found whatever I need to buy/sell to flatten my positions with less slippage than closing my previous positions, and still have some hedging potential, basically looking for the best reward-to-risk.
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Thanks! It sounds like you're using synthetics and hedging to continually evolve/improve your position... that's still off in the future for me, but the perspective is really useful. I'm still working hard at grokking the basic strats, trying to develop a solid intuitive feel for how everything moves for each one (damn, flys are fascinating!) - but this is definitely something I need to learn. Much appreciated!
 
BlueWaterSailor said:
It sounds like you're using synthetics and hedging to continually evolve/improve your position...
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You nailed it. I'm still working out some details, testing and evolving this approach, but it's looking promising and I'm learning from this as well, also trying to gain intuitive understanding of some pricing anomalies. Aiming for automated hedging, but not only using shares.
And I like flies, but finding more fascinating stuff as well.
 
taowave said:
It's very common...
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Not by retail traders using retail brokers because we don't see millions of people doing this or even discussing on Reddit, right? Even mentions of arb or hedging go unanswered because no one has a clue. Also here on ET, whenever anyone asks how to hedge their positions, you can hear crickets.

And when using pro trading platforms, do they support hedging using the underlying/shares, or also options? If options, how do they determine which options to choose? And is it always delta hedging? Can you choose your own delta, or program dynamic delta?
Lastly, which brokers/software is great for this and how many people use it?
Genuinely curious.
 
Didnt mean to open a can of worms,was simply trying to say that I often find myself initiating a position with a simple fly,that inevitably turns into a 30 plus leg monster...

Not sure what you are asking.Every pro platform supports Delta hedging . Are you referring to optimization regarding hedging with options??

I no longer trade in a manner which requires delta hedging as it relates to short gamma/Vega.I am essentially a market maker in options with wide markets and constantly roll my inventory





guru said:
Not by retail traders using retail brokers because we don't see millions of people doing this or even discussing on Reddit, right? Even mentions of arb or hedging go unanswered because no one has a clue. Also here on ET, whenever anyone asks how to hedge their positions, you can hear crickets.

And when using pro trading platforms, do they support hedging using the underlying/shares, or also options? If options, how do they determine which options to choose? And is it always delta hedging? Can you choose your own delta, or program dynamic delta?
Lastly, which brokers/software is great for this and how many people use it?
Genuinely curious.
More...
 
taowave said:
Every pro platform supports Delta hedging .
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I see. I had bad experience using trades with built-in delta hedging at IB (hedging was good, but the price on options was bad), so I was looking for software that can execute better, and allows more automation in terms of hedging. I assumed you were referring to that too, because frequent adjusting & hedging both end up with large structures with many legs.
Though now I'm tinkering with managing smaller combos individually, regardless of other legs & combos on the same underlying.
 
This is not an arb, unless you can lock in a fixed-price borrow on TECS from the Jan to June expiration.
 
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