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Performance - Plain and Simple. Among the strategies discussed on your site I was looking for arbitrage strategies no chance of loss , such as this: Thank you for the question. There are a few different topics that I would like to address in my response. This is not an arbitrage play. The market did not open for days and there was no way to hedge your risk the futures market could have been used to lock in your loss, but they instantly priced in an enormous drop.
If the index moves below that level, you will start to lose money. This strategy is called a ratio spread because you are selling more options than you are buying. In that case, you are reducing risk, but not much.
They are consistent and you can make small amounts of money over extended periods of time. However, one big event will wipe out years of profits and then some. After 20 years, I have seen it many times. As for arbitrage strategies, they are truly riskless. No one in their right mind would sell you the spread because they are guaranteed a loss. The only way you can establish this trade is to leg in. That is what Market Makers do. Market Maker firms have the deepest pockets on Wall Street.
They pay membership fees to the exchanges for the right to make markets in a particular equity or index. The exchange protects these members by making it difficult for a retail customer to post a bid and an ask. Brokerage firms are allotted a certain order cancellation percentage. The brokerage firms identify the source of the cancels and then they start charging the customer. Even if you could do this without the cancellation fees, you would be competing with some of the most sophisticated computer systems in the world.
They auto quote the option markets based on the underlying stock, the other stocks in the group or the sector, option pricing models, the other bids and asks in other option serie… Large financial firms hire the best programmers.
When the firm does get filled on an order, the system recalculates the risk in if needed; it instantly hedges the position using the underlying stock. Large institutions have lower transaction costs, better research, lower carrying costs, and lower margin requirements. They have reduced the profit margins on these trades to the point where only the most efficient systems can compete. If you think about it, everyone would love to make money on a riskless trade.
That type of opportunity attracts stiff competition. If I can nail home one point in this response it would be - forget about arbitrage strategies.
What may be the outcome through expiration. That is an arbitrage trade. This is the type of strategy used by Market Makers as they leg into trades. Hello Sir, I am exploring different option arbitrage strategies. Or is it done automatically by your broker thus avoiding additional commissions? After being in the business for 20 years and working in the OEX pit in its hay-day, I can say with confidence, you are not going to get this trade off.
Sophisticated multi-million dollar auto-quote systems developed by the richest proprietary trading firms make arbitrage extremely rare.
Thank you for replying. I appreciate your taking the time to answer my question and providing your insight. I asked because the last several weekends I have seen the same thing occurring like clockwork. I imagine because of the increased volatility lately. You have to look at real-time bids and asks. As people learn of arb strategies, they think they have found a risk-free way of making money. I will often times see bid and ask with maybe a couple hundred on either side for an option contract that surround intrinsic value almost exactly, however no contracts show in volume during the day.
Why are these not being executed? I have been to the floor of the CBOE and know that floor brokers and traders go back and forth until equilibrium is found. My concern is ensuring that my order is executed and at an appropriate price for options deep in the money that do have some open interest.
Should I place a limit order that is a couple cents over intrinsic value? Would that ensure that my order is executed in a timely fashion? The quotes you see, are auto-quote. Market Maker firms have very complex algorithms that calculate where and option should be priced relative to the stock. I have traded against auto-quote off floor for years, trust me, they are complex programs. There are not many Market Makers left on the floor, technology is much more efficient.
To exit an option trade at a fair price when it is trading at parity, use my search feature to find an article. Posted by Pete Stolcers on November 24, Option Trading Question Among the strategies discussed on your site I was looking for arbitrage strategies no chance of loss , such as this: Option Trading Answer Thank you for the question.
Option Strategies - Good and Bad!