I think the reference to an OEX future was just meant to illustrate the concept. OEX and XEO options are largely priced based on the movement of the SP/ES futures (with an appropriate adjustment) as it is easier to hedge with them rather than buy/sell the 100 component basket...but I'm sure you knew that...
Will this options strategy work?
- Thread starter frank99
- Start date
I think the reference to an OEX future was just meant to illustrate the concept. OEX and XEO options are largely priced based on the movement of the SP/ES futures (with an appropriate adjustment) as it is easier to hedge with them rather than buy/sell the 100 component basket...but I'm sure you knew that...
first, the oex and SPX arent perfectly correlated, so replicating an oex position with ES/SP futures isnt a sure bet. second, once you excersize your puts, you are left holding a naked position which could very well go against you. third, if this is done on expiration friday as you first suggested, short of a black swan, there wont be any market moving news released between 3 and 3:15 99% of the times.
the position you have described is a simple conversion hoping to catch a discrepancy between the values at 3cst and 3:15cst. Most of the times this will not work and you will have lost the edge on 3 legs, the very few times this may work will not offset those losses. I would be very interested to see a link to the place where this strategy is done consistently for a profit, but i doubt a link will be provided.
OK. Once was funny. Like the name of some new home gym equipment. The second time demands a spell check!
Yes, I'm bored. Yes, this is way off topic. Yes, I make spelling mistakes all of the time.
Bite me.
Options Trading: The Hidden Reality, Charles Cottle, p. 210-213, ISBN 1-55738-907-1, (c) 2006
So, you've called me a liar, you've doubted me, and now you're wrong twice.
frank,
long oex ITM calls and short SP futs on expiration fri? Is that the strategy you are talking about?
I havent read McMillian so its hard for me to comment on something taken out of context but just by looking at the position it appears to be some sort of a hybrid synthetic straddle. You are long deltas in the calls and short deltas with the futs, so i am guessing this can be leaned into either direction or traded neutral. Goal as in any straddle is to catch a big move in either direction and since the last day its all gamma, your good leg will be manufacturing deltas very quickly.
say what? a liar? lol just being sceptic is all. When i see someone post a free/easy money strat, it gets the best of me.
After reviewing the pages you outlined(thanks for the link) it appears you are talking about a completely different approach. Ok maybe not different. You are talking about placing the conversion each and every expiration friday before the bell hoping for a big move in that 15 min window so that you can catch the discrepancy and i am saying no, you will not be able to earn doing this. Cottle is talking about arbing "a large move in the market when/if it happens". There is a big difference.
Here is a quote:
"An exercise usually takes place from just after the cash market closes
(3:00 P.M. Chicago time) until the futures and options close (3:15 P.M.
Chicago time) when the OEX combos or the S&P futures at the CME
make a significant move in either direction. If there is a large move in
the market, traders take the opportunity to buy/sell the S&Ps and exercise
the OEX calls/puts that are far enough in the money. Traders have until
3:20pm, or five minutes after the options market close to exercise, and
public customers have a little bit more time. âFar enough in the moneyâ
means that they could either buy the same strike puts, for example in the
case of a break (market decline), for significantly less than the comboâs
discount to cash (dividends on the basket minus the implied carry) and
still be in the conversion (inter-market spread), or buy the same strike
puts a lot cheaper than they have recently been trading for. Conversely,
if there is an after-cash-market rally, traders will sell the S&Ps and
exercise their puts. Of course, the corresponding calls must be trading
cheaper than the premium to cash (implied interest minus dividends) and
still put the trader into the reversal at a favorable price."
In defence of FullyArticulate, not that he can't defend himself, he did qualify the strategy in his original post:
"Do this on a day when earnings are expected after market close which could really move the markets."
I'm not sure he was suggesting this was a sure-thing strategy that could be used every expiration.
Oh well. We're all in agreement now. Not happy with that situation I'll be the first to say: The Departed sucked
