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Will SSF's replace Options for hedging?
- Thread starter Cdntrader
- Start date
They have they potential to be another vehicle for hedging, whether they'll be a replacement remains to be seen.
Currently you can create a synthetic futures position in the options by buying an at the money call and selling an at the money put against it, or vice versa. In theory you should be able to effect the same trade in SSF's with lower transaction costs. The two questions right now are what the regulatory framework is(we're still waiting), and then, what will the liquidity be like.
I wish I could give you better answers, but too many things are still up in the air.
Potential? Yes. Will they? Excellent question.
Currently you can create a synthetic futures position in the options by buying an at the money call and selling an at the money put against it, or vice versa. In theory you should be able to effect the same trade in SSF's with lower transaction costs. The two questions right now are what the regulatory framework is(we're still waiting), and then, what will the liquidity be like.
I wish I could give you better answers, but too many things are still up in the air.
Potential? Yes. Will they? Excellent question.
Originally posted by matthew
They have they potential to be another vehicle for hedging, whether they'll be a replacement remains to be seen.
Currently you can create a synthetic futures position in the options by buying an at the money call and selling an at the money put against it, or vice versa. In theory you should be able to effect the same trade in SSF's with lower transaction costs. The two questions right now are what the regulatory framework is(we're still waiting), and then, what will the liquidity be like.
I wish I could give you better answers, but too many things are still up in the air.
Potential? Yes. Will they? Excellent question.
Interesting. I also found this commentary:
Q. Why donât investors just use existing options contracts to create the same results?
A. Simplicity. After all, to create a synthetic long or short position in a share, one has to buy a pair of options, with concomitant execution and related risks, as well as greater brokerage expense. Thereâs also the issue that using in-the-money strikes for synthetic options is usually costly because the bid-offer spread is broader thanks to less liquidity in the in-the-money options.
Single stock futures allow a trader to create a very simple long or short position in a share with a single purchase or sale.
on http://www.adtrading.com/content/co...7&IssueID=A739A9E7-ADF7-11D4-B98500D0B73E4707
My .02 -
I think SSFs are going to be a heavily traded investment vehicle due to less volatility than stock, commission breaks, margin requirements, and soon the ability to short stock on a down tick with the contract as a hedge. IMO
ETA is late May but I don't think any firms will have the lines installed or have the software set up until June at the earliest.
I think SSFs are going to be a heavily traded investment vehicle due to less volatility than stock, commission breaks, margin requirements, and soon the ability to short stock on a down tick with the contract as a hedge. IMO
ETA is late May but I don't think any firms will have the lines installed or have the software set up until June at the earliest.
however, do not forget that options and futures are
different animals. long stock / short fut. is completely
other than only long stock / long put.
(de facto same as long stock / long put / short call).
creating some kind of "bullet" will be more easy,
but since only major stocks are future-able, this might
be a minor issue.
different animals. long stock / short fut. is completely
other than only long stock / long put.
(de facto same as long stock / long put / short call).
creating some kind of "bullet" will be more easy,
but since only major stocks are future-able, this might
be a minor issue.
You may want to check the article I wrote in TASC this month...about SSF stategies changing some of the fundementals of option strategies. I'll be doing 2 more follow ups.
Since you need to re-calculate all the numbers based on factors like not paying (or receiving with short stock) full interest, but having to pay "juice" for the futures (over the underlying), etc. we will have to see if the liquidity is there to keep the option players happy.
I will stay in contact with the people at "One Chicago" and will be posting a few comments on their website.
This may be a real fun new product, we'll have to wait and see.
Don
Since you need to re-calculate all the numbers based on factors like not paying (or receiving with short stock) full interest, but having to pay "juice" for the futures (over the underlying), etc. we will have to see if the liquidity is there to keep the option players happy.
I will stay in contact with the people at "One Chicago" and will be posting a few comments on their website.
This may be a real fun new product, we'll have to wait and see.
Don
Don,
I don't know that 'juice' is a fair characterization. Anymore than it would be fair for me to call margin interest in a stock account 'juice'. The word carries a negative connotation.
The 'juice' you speak of is simply a pricing in of the opportunity cost (read interest rate) of tying up a certain amount of money for a certain period of time. We call it the 'cost of carry' (which in the case of some things can include storage and insurance charges).
Interest rates are the 1st thing that come into a futures to cash arbitrageur's calculations.
I don't know that 'juice' is a fair characterization. Anymore than it would be fair for me to call margin interest in a stock account 'juice'. The word carries a negative connotation.
The 'juice' you speak of is simply a pricing in of the opportunity cost (read interest rate) of tying up a certain amount of money for a certain period of time. We call it the 'cost of carry' (which in the case of some things can include storage and insurance charges).
Interest rates are the 1st thing that come into a futures to cash arbitrageur's calculations.
Originally posted by matthew
Don,
I don't know that 'juice' is a fair characterization. Anymore than it would be fair for me to call margin interest in a stock account 'juice'. The word carries a negative connotation.
The 'juice' you speak of is simply a pricing in of the opportunity cost (read interest rate) of tying up a certain amount of money for a certain period of time. We call it the 'cost of carry' (which in the case of some things can include storage and insurance charges).
Interest rates are the 1st thing that come into a futures to cash arbitrageur's calculations.
Nothing negative meant at all, just the cost of carry is all I meant. We are on the same page, calculation wise, I'm sure!! (Bad choice of words in my haste).
Don
I think this could well be a watershed event for traders. There are two problems, other than Wall Street/SEC stalling: 1. Possible wide spreads due to lack of liquidity, and 2. Contracts are not fungible. I don't think either will be a big issue, although the liquidity issue has stunted SSF's in overseas markets.
I am assuming the rules of at least one of the four exchanges will not include nonsense prohibitng "marketmaking" by non-members, unlike the options exchanges. I have been assured by a consultant to the Nasdaq group that they will be trader-friendly. The underlying stocks are for the most part very liquid and I think traders will flock to play marketmaker. Spreads in many of the contracts should therefore be tight and right. As for the fungibility issue, it will surely drive the weakest link exchanges out of business pretty quickly. If one exchange has all of the liquidity, you are not going to risk getting stuck in a contract at another one, even if you can get it at a little better price., unless you are arbing against the underlying.
I am alittle surprised there has not been more of a marketing blitz by the trading platform companies. This could be very big for someone. In fact, if IB could get their act together for a RealTick killer, theycould have it all.
I am assuming the rules of at least one of the four exchanges will not include nonsense prohibitng "marketmaking" by non-members, unlike the options exchanges. I have been assured by a consultant to the Nasdaq group that they will be trader-friendly. The underlying stocks are for the most part very liquid and I think traders will flock to play marketmaker. Spreads in many of the contracts should therefore be tight and right. As for the fungibility issue, it will surely drive the weakest link exchanges out of business pretty quickly. If one exchange has all of the liquidity, you are not going to risk getting stuck in a contract at another one, even if you can get it at a little better price., unless you are arbing against the underlying.
I am alittle surprised there has not been more of a marketing blitz by the trading platform companies. This could be very big for someone. In fact, if IB could get their act together for a RealTick killer, theycould have it all.