2
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If my math is correct, if I construct the following portfolio of options the worst that I can do regardless of what the underlying does is profit $1.74 (less commissions).

Is this correct? Are there any risks that I'm not taking into account? How likely are those risks to occur?

  • SELL 2 SPY150918P00225000 FOR 17.50 (444 open)
  • SELL 1 SPY150918C00169000 FOR 39.44 (105 open)
  • SELL 1 SPY150918C00168000 FOR 40.44 (104 open)
  • BUY 1 SPY150918P00170000 FOR 0.05 (1500 open)
  • BUY 1 SPY150918P00167000 FOR 0.04 (1500 open)
  • BUY 1 SPY150918C00224000 FOR 0.03 (3010 open)
  • BUY 1 SPY150918C00226000 FOR 0.02 (1192 open)

Thanks!

-JWW

UPDATE 2016-10-03:

Originally, I was trying to find arbitrage opportunities in options with the same underlying and the same expiration using a linear programming toy I was working on at the time. It would do this:

  1. Go through each ticker on the S&P 500
  2. Go through each option expiration period
  3. Build an LP model that combines buying / selling puts / calls so that the model is profitable regardless what happens to the underlying (falls to 0, or goes to ~infinity)

The model discovered a strategy that worked like this (my post on trade-king forums at the time):

First find a call and put option (sell 1, buy the other) with the same strike and expiration that if executed today would be profitable. If you're selling a put, prepare to sell 100 shares of the underlying short. When you do, your profit is locked in. Set up a trigger to sell short the stocks when the underlying falls to a certain point. It seems like this would create a synthetic call option that you get paid to get into. If you come into a situation where you buy a put and sell a call; be prepared to buy 100 shares (margin?). This would create a synthetic put. If you're lucky enough to find this situation on the same stock at the same expiration; you could do a synth-straddle.

...and why it doesn't work:

Unfortunately it looks like ex-div date nukes this concept. 96% of the stocks that show up in my screener as being profitable through this trade have an ex-div date < option expiration date. Oh well...

Hope this helps someone

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  • $\begingroup$ You would have to pay a bid ask spread on each position, which may eliminate the arbitrage. $\endgroup$ – noob2 Aug 19 '15 at 19:13
  • $\begingroup$ thanks for the comment. The model I'm using pulls from TradeKing's API, and assumes selling the bid price (low) and buying from the ask price (high). It seems like as long as the total portfolio's price doesn't move by more than the model says the profit should be; it still makes money. $\endgroup$ – JWally Aug 19 '15 at 20:12
  • $\begingroup$ @JWally what do you mean by "open" are these Open Interest numbers or how many options you have Open already? $\endgroup$ – Rime Aug 20 '15 at 8:34
  • $\begingroup$ @Rime turns out those numbers aren't what I thought they were. For buying, the number is the size of the latest ask; and for selling they are the size of the latest bid. I thought they were book depth. $\endgroup$ – JWally Aug 20 '15 at 17:55
  • $\begingroup$ @JWally, could you provide a link on the model? $\endgroup$ – Nick Oct 2 '16 at 0:45

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