Your mission Jim....

[Mofra]

DTM,

I really hope this little observation isn't leading you down the wrong path, however:

Clues thus far:

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

Hmmmmm... if TIMS only calulates the net risk after taking into account all option positions and some money market securities are acceptable for use as a margin;
a. you may be able to reduce your margin requirements below that of a simple covered call
b. the interest earned from a deposit security could be added to risk-reducing factors in your equation

Moneytree feel free to correct and/or ensure I'm not getting sidetracked

Haven't thought about this for a couple of weeks but it's not the sort of conundrum that I can resist coming back to.

Cheers

 

[money tree]

excellent work Mofra



2 hurdles overcome. One remaining. Blame your broker.

 

[SuperTed]

Side note on the "blame yr broker" quote * I have no broker margins for writing uncovered options only OCH margins. The old days when i had to have 20% broker margins as well as OCH are long gone ;-) There are a few brokers out thier that will do this. OCh has a list of accepted securties

 

[knit 1 pearl 2]

is it any thing to do with dividends

and r u also spruiking your course here?

 

[money tree]

error

1 hurdle beaten. 2 remain, though Ted beat one. Which broker Ted? I asked a while ago about brokers doing OCH + 0% and nobody responded. Comsec wants 50%, Avcol 30%, Sanford 1000% lol......

 

[SuperTed]

Mine is a small/large firm.

Commsec isnt to bad as it is only 1.5x OCH margins (thats including OCH as far as im aware).

Depends how close to the money you want to go. The Sanford 50% cash cover of total value +OCH is a joke for that matter so is Etrade 100%...(lol i would need 2 million in cash reserves ;-) instead of sometimes 50k.

 

[money tree]

"a small/large firm" named?

 

[SuperTed]

LoL 1 done, 2 to go.

I pm'd you the firm money.

But to help others most smaller firms the brokers themselves carry the risk as they work for themselves. They give a % of the brokerage they earn as rent ;-) (if you wanna look at it like that).

Depends on the broker but look at smaller full service firms not discount or large brokerages which normally have more rules.

I pay 30% more for brokerage now compared to what i used to pay with TDwaterhouse but it easily makes up for it by not having to have 20% cash cover + OCH

 

[SuperTed]

error

I asked a while ago about brokers doing OCH + 0% and nobody responded. Comsec wants 50%, Avcol 30%, Sanford 1000% lol......

Mustnt have seen it, i did do several posts on this topic at reefcap...but stopped as i got bored talking to myself over there ;-)

This is from the asx seems quite old but lists accredited option firms

http://www.asx.com.au/investor/pdf/OptionsAdvisers.pdf

 

[Synapse]

Hi,

Here are two different ways to create a risk-free trade involving options, which in both cases will definitely return some form of profit (albeit a fairly small actual amount, but still a profit none-the-less).

1. Buy yourself some stock, then sell a long dated (say 12 months until Expiry) at-the-money Call & Buy an at-the-money Put (also 12 months until Expiry). Due to the inclusions of the "risk free" interest rate in the Option Premium calculations, you'll roughly net the equivalent return as the risk free rate over the course of the 12 months, irregardless of what the underlying stock price does. For example, assuming stock XYZ is $20.00 with IV=30%, here are is an example trade:
Buy 1,000 x XYZ Shares @ $20.00
Sell 1 x XYZ $20.00 Call Option @ 289c
Buy 1 x XYZ $20.00 Put Option @ 194c

Net result = 95c profit based on these premiums, which is a guaranteed 5% (approx) return on your investment no matter what happens (although you may need to manage the trade if the sold Calls are in-the-money approaching an ex-dividend date to avoid early exercise. This wouldn't be a problem unless the share did something weird on the actual ex-dividend date, thus messing up the value of your bought Put option).


2. This is a little more complex, but should work fine: Assume stock XYZ is $20.00 with IV=30%. Place following trade, again using 12 month Options:
Sell $20.00 Call @ 289c
Buy $20.50 Call @ 266c
Sell $20.50 Put @ 220c
Buy $20.00 Put @ 194c

Net Result = 49c Credit (i.e. $490.00 per set of contracts), however cost to close will always be 50c (i.e., $500.00). This results in a $10.00 loss per set of contracts. However, being tricky traders who know how the ACH works, we'd structure things in one of the following ways:

(a) Simply leave the full net credit received plus provide $10.00 per set of contracts as security with our Broker, knowing that if we use someone like "Avcol Stockbroking" they'll pay interest at around 5% per annum on our funds even while they are tied up acting as margin cover! This means we've returned about $25.00 in interest after the year, therefore we're about $15.00 in front even after paying the small extra amount to close the position (ignoring brokerage/fees); OR

(b) If we are currently owning shares we could lodge our shareholdings as security for this option position, and use the net credit received to invest at the risk-free cash rate of 5.5% to earn about $27.00 in interest over the 12 months. Once again, this more than makes up for the $10.00 loss we know we are faced with when closing the trade.

Obviously, you'd need to do a large number of contracts to ensure you cover the Brokerage costs and ACH fees. Furthermore, I'd suggest using European style Options so that you know for sure you cannot be Exercised prior to the Expiry Date. Using XJO index options would be perfect as an example.

I trust you'll find this a useful answer to your challenge!


Jason.


P.S. Would anyone like to calculate the actual % return you are really earning on your invested funds (i.e. $10.00 per set of contracts) in scenario 2 above?? You might be in for a surprise!

 

[money tree]

getting real close now.

a few more clues given also...

there may be 100 different 'risk-free' trades. I thought of another since starting this thread.

goes like this:

long dated, deep itm puts have negative time premium. buy an xjo dec 6000 put, write june atm puts. when they expire, write sept. when they expire sell the dec. you get paid for holding the dec put, since time value is negative. you sell time value 3x and no intrinsic value and there is no long term risk. you could buy a longer dated put and write more shorter puts to boost the return.

 

[positivecashflow]

When you initiate the trade it's not exactly risk free... You risk the initial debit paid... As you roll each expiry of the short put then yes you reduce the risk as you collect the premium.

 

[wayneL]

Hi,


2. This is a little more complex, but should work fine: Assume stock XYZ is $20.00 with IV=30%. Place following trade, again using 12 month Options:
Sell $20.00 Call @ 289c
Buy $20.50 Call @ 266c
Sell $20.50 Put @ 220c
Buy $20.00 Put @ 194c

Net Result = 49c Credit (i.e. $490.00 per set of contracts), however cost to close will always be 50c (i.e., $500.00). This results in a $10.00 loss per set of contracts. However, being tricky traders who know how the ACH works, we'd structure things in one of the following ways:

Why not go way away from the money with the box spread...like:

Sell $25.00 Call @ 84c
Buy $15.00 Call @ 5860c
Sell $15.00 Put @ 22c
Buy $25.00 Put @ 5180c

and get a credit of around $10.00...interest on $10k @ 5% being $500

 

[Synapse]

Why not go way away from the money with the box spread...like:

Sell $25.00 Call @ 84c
Buy $15.00 Call @ 5860c
Sell $15.00 Put @ 22c
Buy $25.00 Put @ 5180c

and get a credit of around $10.00...interest on $10k @ 5% being $500

Hi Wayne,

There would definitely be numerous variations as to which strike prices you could use when placing a box spread such as this. Please note that your example trade results in a net debit as you've described it and this would be a guaranteed losing trade based on those premiums. On the other hand it'd be a guaranteed winner if you swapped the long and short legs and did set it up for a massive > $10 net credit. By the way, I can't seem to replicate the premiums you've used - which pricing model are you using? Also, what IV, time until expiry and risk free rate did you use to generate those figures? Did you incorporate some form of dividend payment(s) into the pricing calculation?

To answer your question, the further away from the money you go, the more difficult the trade would be to place at any kind of fair premium value and furthermore you'd be up for more brokerage as the total dollar value of all 4 x legs would increase. This is no reason not to explore the possibilities, though...

My comments were meant more as food for thought and just one way of making something fit to the parameters that money tree had originally stated. I acknowledge that there will be many better approaches - indeed I found two other more efficient combinations of Options to achieve a better potential return within minutes finishing writing my other post.

I'd like to encourage us all to brainstorm more on this and see what we can come up with... Creating trades which will lock-in a predetermined profit, irregardless of the future movement in the underlying share price, would certainly be worth exploiting whenever possible!

Would anyone else like to add their comments/thoughts, in particular about setting up a 12 month long trade for a net credit and earning interest on the funds received?


Jason.

 

[wayneL]

Hi Wayne,

There would definitely be numerous variations as to which strike prices you could use when placing a box spread such as this. Please note that your example trade results in a net debit as you've described it and this would be a guaranteed losing trade based on those premiums. On the other hand it'd be a guaranteed winner if you swapped the long and short legs and did set it up for a massive > $10 net credit. By the way, I can't seem to replicate the premiums you've used - which pricing model are you using? Also, what IV, time until expiry and risk free rate did you use to generate those figures? Did you incorporate some form of dividend payment(s) into the pricing calculation?

To answer your question, the further away from the money you go, the more difficult the trade would be to place at any kind of fair premium value and furthermore you'd be up for more brokerage as the total dollar value of all 4 x legs would increase. This is no reason not to explore the possibilities, though...

My comments were meant more as food for thought and just one way of making something fit to the parameters that money tree had originally stated. I acknowledge that there will be many better approaches - indeed I found two other more efficient combinations of Options to achieve a better potential return within minutes finishing writing my other post.

I'd like to encourage us all to brainstorm more on this and see what we can come up with... Creating trades which will lock-in a predetermined profit, irregardless of the future movement in the underlying share price, would certainly be worth exploiting whenever possible!

Would anyone else like to add their comments/thoughts, in particular about setting up a 12 month long trade for a net credit and earning interest on the funds received?


Jason.

OOPS ...an error in transposing

Should be:

BUY $25.00 Call
SELL $15.00 Call
BUY $15.00 Put
SELL $25.00 Put

....to get a ~$10.00 credit

Your other comments really highlight the difference between the Aussie and US options markets

In the US, fair premium is available that far away from the money, often at zero skew. In fact strikes are at $2.50 intervals at this level, rather than the 50c intervals here.

Also commission is charged on a "per contract" basis, negating the concern of high commissions on net contract value.

Margins on verticals are also different.

>>>"My comments were meant more as food for thought and just one way of making something fit to the parameters that money tree had originally stated. "<<<<

That's what we're all doing on this thread.

 

[SuperTed]

In the US, fair premium is available that far away from the money, often at zero skew.

Think i need to start trading over there. The "market makers" really screw the OTM series here and have no concept of "fair" price

 

[wayneL]

Think i need to start trading over there. The "market makers" really screw the OTM series here and have no concept of "fair" price

Well the US MM's aren't exactly your fairy godmother. But they're kept a lot more honest by the number of players in most markets and aren't so openly larcenous. You also have a higher chance of an actual trader being on the other end of the trade.

You can also trade any spread...even custom spreads...online....even naked calls if you want, all at $1 per contract thru IB.

That said, I could never go back to the ASX.

 

[kaveman]

had a quick look through this thread after it was mentioned elsewhere.
It seems that you sell an option while buying others etc to make a risk free trade?
Does writing an option automatically mean it will get bought by someone? If no then is this not a risk, or do you not buy the other options until yours has been sold.

 

[Mofra]

had a quick look through this thread after it was mentioned elsewhere.
It seems that you sell an option while buying others etc to make a risk free trade?

Firstly, thanks for bringing the post up again. Completely forgot about this mental exercise. We are attempting to figure out some risk free trades - obviously the pros doing it better than part-timers like myself

Does writing an option automatically mean it will get bought by someone?

Yes, your sale needs to be matched by a buyer for the trade to open

 

[kaveman]

Yes, your sale needs to be matched by a buyer for the trade to open

thanks so the answer would be "no" it is not automatic. Writing an option only gets taken if you have a buyer at the price you want.