Your mission Jim....

money tree · 3 February 2005

well its a damn good effort, and it may even work on rare occasion, but it just doesnt sound right.

it would be great if the call sold for 14c and the put for 5, but its just not realistic in my experience. you will find the two prices much closer according to put/call parity theory.

The strategy is not suitable for div stripping because of the risks of exercise.

You have the skills to get there in the end. Question is, do you have the patience?

wayneL · 3 February 2005

DTM said:
OK. This may simple but workable using one of the methods above using HHG shares an example.

1. Buy 30,000 HHG shares @ $1.65 for $49,500
2. Buy March 1.60 Put @ .05 X 30 contracts for $1,500
3. Sell the March 1.60 Call @ .14 X 30 contracts for $4,200
4. Net Credit received for option positions $2,700

Worst case scenario
Share price ends at 1.60 or less and call option not excercised. Your loss is limited to the 5 cents lost in the share price because you have the put option. Loss = $1.65 - $1.60 = -$1,500. Because you have received a net credit of $2,700 from the sale of the option, the net profit is $1,200 ($2,700 - $1,500) which equates to approximately 2.4% return.

Best case scenario
Share price ends above strike price and call options are excercised. Shares are delivered and you keep the credit received of $2,700 which equates to approximately 5.5%.

Since HHG options dates are every three months, you might be able to do it four times a year for a theoritcal return of 21% pa. Conditions have to be right for it but its do able.

Theoritcally on a best case scenario, you should be able to find shares that have monthly exercise prices and do the same, therefore, if you were exercised every month with an average of 5.5% return, your return would be 65% per annum without compounding.

Worst case scenario where you aren't exercised every month and share price drops, your return would 29% pa uncompounded.

Food for thought.

:bite: :bite: :bite:

Let me know what people think.

This strategy is known as a conversion, or a locked position.

Nice if you can construct it at a credit....but are those option prices fillable or are they closing prices? You have a huge volatility skew there if so. Normally they are at a small debit including commisions and a credit is rarely achievable.

They are normally used, to lock in a profit or to hedge against adverse movement.

Cheers

DTM · 3 February 2005

money tree said:
well its a damn good effort, and it may even work on rare occasion, but it just doesnt sound right.

it would be great if the call sold for 14c and the put for 5, but its just not realistic in my experience. you will find the two prices much closer according to put/call parity theory.

The strategy is not suitable for div stripping because of the risks of exercise.

You have the skills to get there in the end. Question is, do you have the patience?

The prices were from today. I think that generally, you would find these kind of prices when a stock is moving up and has just gone past a strike price. You would have to have patience and you have to look for the right priced stock, ie between $1 to $5.

I think that realistically, you could do it at least 6 times a year without too much effort, and if you had 50k to use, it would make a nice return, even nicer with dividend capture. Pretty much like a covered call except you're wanting to be exercised.

If some one runs with it, give us your feed back. I mostly wouldn't use this as I'm mostly a directional options trader with better returns.

Cheers.

:drink:

money tree · 3 February 2005

yes wayne is right. It is an old strategy and has other names such as "protected portfolio" or "collar"

If there were a net credit available, it would be spotted and arbitraged quickly, thus closing the gap.

lets say this method does work. Do you stop searching at this point or try to find something better?

Every time I think I have found the best result possible, it is superceeded within a month. My current strategy returns 187% p.a. with zero risk. The previous strategy ran at +51% with zero risk.

DTM · 3 February 2005

wayneL said:
This strategy is known as a conversion, or a locked position.

Nice if you can construct it at a credit....but are those option prices fillable or are they closing prices? You have a huge volatility skew there if so. Normally they are at a small debit including commisions and a credit is rarely achievable.

They are normally used, to lock in a profit or to hedge against adverse movement.

Cheers

Hi Wayne,

These options were prices were filled and are liquid.

I read Rozella's thread with interest because she has a clear strategy and it's always interesting to read. I note that she has bought into OST at 2.83. If we were to use this conversion method for the month of Feb with 30k or so, it would go like this.

1. Buy 10,000 OST shares @ $2.83 for $28,300.
2. Sell 10 contracts of the $2.75 Feb call for a credit of $1,450
3. Buy 10 contracts of the $2.75 Feb put for a debit of $ 400

A net credit of approx. $1,050 is collected.

Worst case scenario, price drops 8 cents to 2.75 or less and share loss would be limited to $1,050 less $800 = $200 profit due to the puts purchased hence only $200 of credit would be left.

Best case scenario would be the call options were exercised and you have $1,000 return or 3.5% return from a 3 week trade.

If Rozella was serious about the dividend capture, she would be looking at the May options. This is what it would look like from the prices that were traded today.

1 Buy 10,000 of the underlying OST stock @ 2.83 for $28,300
2 Sell 10 contracts of the $2.75 May call for a credit $ 2,000
3 Buy 10 contracts of the $2.75 May put for a debit $ 1,100

Net credit received would be $900.

Best case scenario.
Call options exercised before 22 March for a profit of $900 or 3% return.

Worst case scenario
Price of stock drops to $2.75 or less hence loss would be limited to $900 (credit received) less $800 (8 cents drop X 10,000 shares) hence your profit would approx be $100. This would also mean that you keep the shares and receive the 5 cents fully franked dividend ($500) if shares are kept past 22 March. Worst case scenario probably works out the same as best case scenario because of taxation reasons.

The downside to this is that it limits your upward potential, but the upside means that it doesn't have a downside risk.

Now that we've finished talking about small change..., :2twocents

Money Tree, how about you stop teasing us and show us how to take the risk out of making 100% plus per annum!!!

DTM · 3 February 2005

money tree said:
well its a damn good effort, and it may even work on rare occasion, but it just doesnt sound right.

it would be great if the call sold for 14c and the put for 5, but its just not realistic in my experience. you will find the two prices much closer according to put/call parity theory.

The strategy is not suitable for div stripping because of the risks of exercise.

You have the skills to get there in the end. Question is, do you have the patience?

PS The call options are deep in the money whereas the put options are out of the money, hence a net credit would be received.

wayneL · 3 February 2005

DT,

I was using the wrong terminology: credit is not correct. Because you are buying shares, the strategy will always be at a debit.

But because the strategy is a locked strategy it will always be a locked profit or loss, save for early exersize.

I am having trouble believing those prices are fillable simultaneosly. The arb boys would be in like a flash and I can't believe the RTs would leave a hole like that open.

Payoff diagram below (at theoretically equal IVs)

wayneL · 4 February 2005

ROTFLMAO

I am getting some interesting looking payoff diagrams trying to work this out!

Also some useful LOW risk strategies I would never have thought of otherwise.

No cigar for zero risk yet.

Cheers

DTM · 4 February 2005

Wayne

What software are you using? Looks interesting. Need to get me some of that. :1luvu:

wayneL · 4 February 2005

DTM said:
Wayne

What software are you using? Looks interesting. Need to get me some of that. :1luvu:

http://www.hoadley.net/options

basic version (what you see) is free, you can buy various add on functions, but theses are quite cheap.

I never make a trade without it.

wayneL · 4 February 2005

This will take you to straight to the free strategy modeller

http://www.hoadley.net/options/strategymodel.htm

DTM · 4 February 2005

wayneL said:
This will take you to straight to the free strategy modeller

http://www.hoadley.net/options/strategymodel.htm

Thanks Wayne. :xyxthumbs

positivecashflow · 4 February 2005

Hi DTM,

I thought you use OptionGear for your options risk graphs etc...

DTM · 4 February 2005

positivecashflow said:
Hi DTM,

I thought you use OptionGear for your options risk graphs etc...

Hi Posi

I normally work out the risk graph in my mind. I actually haven't used optiongear graphs very much as I mostly use t/a for working out where to buy. Options that are cheap are easy to spot but you have to be patient or be in the right place at the right time to get them. Other times you have to buy straight away at market price as the expected market move may take the price out of your range. If it moves before I get a chance to buy than I will let it go as I normally don't chase it (as a policy).

DTM · 4 February 2005

money tree said:
your mission Jim, should you decide to accept it, it to design a RISK-FREE system that generates a consistent profit.

Risk free means having nett zero exposure. It also means there is no market movement scenario that could cause the system to fail.

OK Money Tree..... We give up. :dunno: :dunno: :dunno:

How do you place options trades with no risk, no market intervention for 158% return pa????

DTM · 4 February 2005

DTM said:
OK Money Tree..... We give up. :dunno: :dunno: :dunno:

How do you place options trades with no risk, no market intervention for 158% return pa????

Oops. Sorry, 188%.

money tree · 4 February 2005

money tree said:
let me just say it certainly is possible.

you have to think long and hard.

Im not going to give away the system. Unless you understand a system, you cant make it work. And you dont deserve to be handed such a system on a plate.

Im quite happy to comment on whatever you come up with, even steer you in the right direction. But Im not giving away my system just because you give up....

DTM · 4 February 2005

Can you give us a clue?

Does it involve shares?

money tree · 4 February 2005

Clues thus far:

"Risk free means having nett zero exposure. It also means there is no market movement scenario that could cause the system to fail."

"Put your money into a Bankwest account for 6% return per annum. I can't see any risks in this system"

"think see-saw"

"The mission was to eliminate risk. Derivatives are risk-limiting instruments. You are on the right track."

"A + B = C + D

risk A + risk B = total risk + return

first problem is how to get A plus B to equal zero. The second problem is how to avoid a -D when C is zero."

"The strategy is not suitable for div stripping because of the risks of exercise."

The Barbarian Investor · 5 February 2005

money tree said:
nice guess, but no cigar

the strategy must remain risk free at all times. No intervention is required regardless of market action.

No intervention "regardless" of Market Action ???

:goodnight No Idea??? I'll leave it to more experienced and better minds than mine to figure this one out!!

Your mission Jim....

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