Optioin question
The set of options in question is the 19600 Put and 20000 Put
For simplicity, lets assume the 19600 Put is trading at 930 and the 20000 Put is at 1130, for a nice round difference of 200, and ignore all transaction cost.
Now if I buy the 20000 Put and sell the 19600 Put, it will cost me 200 (-200) and when these expires, depending on the closing price of the Sep contract, I may:
Close at 20000 or above, get 0 from settlement, total = -200 + 0 = -200
Close at 19800, get 200 from settlement, total = -200 + 200 = 0
Close at 19600 or below, get 400 from settlement, total = -200 + 400 = +200
Its basically a 50:50 bet, max win and lost are both 200. From these numbers, it is obvious that this bet is neutral if the Sep contract is around 19800.
But actually, the Sep contract is around 19420. It seems that if I were to place these bets as if I am playing dice, I would be having a huge advantage. The number could go against me for about 200 points and I would still be winning. And the difference is too big to be accounted for by spread and transaction cost. But I also realized that there is no free lunch and these things shouldn't happen.
Anyone have any comments?
Quote: andysif
The set of options in question is the 19600 Put and 20000 Put
For simplicity, lets assume the 19600 Put is trading at 930 and the 20000 Put is at 1130, for a nice round difference of 200, and ignore all transaction cost.
Now if I buy the 20000 Put and sell the 19600 Put, it will cost me 200 (-200) and when these expires, depending on the closing price of the Sep contract, I may:
Close at 20000 or above, get 0 from settlement, total = -200 + 0 = -200
Close at 19800, get 200 from settlement, total = -200 + 200 = 0
Close at 19600 or below, get 400 from settlement, total = -200 + 400 = +200
Its basically a 50:50 bet, max win and lost are both 200. From these numbers, it is obvious that this bet is neutral if the Sep contract is around 19800.
you have found what is know as a put call parity arbitrage....they happen all the time...you just need to look for them..........For those of you who want a quick lesson..here is a link to finding an put call arbitrage....FYI if you have about 20 extra hours you should watch all of Sal's videos on finance, economics, currency ect ect........he has the best FREE online academy in the world IMO.......WAY back in the day I used to business with this guy when at WaMu and he was working for a hedge fund.....I was an economist at WaMu in the bond department(CDO's)......I used to look at his models(or try and decode them as everyone's models are super secret)........I would say he is the smartest guy I have every come across.....and that's say A LOT....As I have known some smart mofo's
I could explain it but is MUCH easier just to watch videos on it
http://www.khanacademy.org/video/put-call-parity-arbitrage-i?playlist=Finance
Quote: vert1276
you have found what is know as a put call parity arbitrage....they happen all the time...you just need to look for them..........For those of you who want a quick lesson..here is a link to finding an put call arbitrage....FYI if you have about 20 extra hours you should watch all of Sal's videos on finance, economics, currency ect ect........he has the best FREE online academy in the world IMO.......WAY back in the day I used to business with this guy when at WaMu and he was working for a hedge fund.....I was an economist at WaMu in the bond department(CDO's)......I used to look at his models(or try and decode them as everyone's models are super secret)........I would say he is the smartest guy I have every come across.....and that's say A LOT....As I have known some smart mofo's
I could explain it but is MUCH easier just to watch videos on it
http://www.khanacademy.org/video/put-call-parity-arbitrage-i?playlist=Finance
Appreciate your help, but it seems my question is not a put call parity problem.
Even though I have marked 4 options in the picture, my question is just concerned with the 2 Puts on the right hand side. I am not asking about the relationship between the price of a call and a put, but rather, why the spread between the 20000 and 19600 put is just 200 when the Sep is at 19400. Of course, pricing model can give an explanation but intuitively, I think it should be more, say 300. You have to risk more to earn the 100 profit because the index is already on your side.
Quote: rdw4potusHow long is it until the options expire? Looking at the Open, high/low, and previous close, it looks like the contract was *very* recently trading at 19800ish. Maybe the market thinks it'll be there again by expiration?
It will expire end of September.
Yes, the day high is around 19860, but as you can see the last traded is 19426.
Quote: matildaBear put spread -- You win if price of underlying security decreases.
Yes, it is a simple bear put spread. But my point is, the risk/return for that bear put spread should reflect the current position of the Sep contract. More precisely, for a 20000/19600 spread to have a 50/50 return, the Sep contract should be at 19800, not 19400.
Quote: andysifYes, it is a simple bear put spread. But my point is, the risk/return for that bear put spread should reflect the current position of the Sep contract. More precisely, for a 20000/19600 spread to have a 50/50 return, the Sep contract should be at 19800, not 19400.
Options markets don't usually react as quickly as futures markets. The bid/ask on options is usually wider, essentially to compensate. Looks like HSI is back up today, trading around 19750 as I'm writing this. Until 3 weeks ago, 21000-23000 was the trading range. I like your arb play, and I think I'd take the put side of this bet if it was costless and I had to take a position, but I'm not sure if the odds of success will cover the actual costs of the transaction.
As an aside, how are stock options named? If expiry is at the end of sept, is that October's contract? That's the convention for commodities futures and options (example, September's natural gas futures contract settles on 8/29/11).
Quote: rdw4potusOptions markets don't usually react as quickly as futures markets. The bid/ask on options is usually wider, essentially to compensate. Looks like HSI is back up today, trading around 19750 as I'm writing this. Until 3 weeks ago, 21000-23000 was the trading range. I like your arb play, and I think I'd take the put side of this bet if it was costless and I had to take a position, but I'm not sure if the odds of success will cover the actual costs of the transaction.
As an aside, how are stock options named? If expiry is at the end of sept, is that October's contract? That's the convention for commodities futures and options (example, September's natural gas futures contract settles on 8/29/11).
In HK each month's contract closes at the "day before the last trading day", so an Aug contract close on 30 Aug and a Sep contract close on 29 Sep.
A - L is call from Jan to Dec, M - X is put from Jan to Dec
So HIS18600U1 is a 2011 Sep 18600 Put that closes on 29 Sep.
