LinkedIn Options Arbitrage

it does seem like arbitrage to me, which tbh isn't surprising this early on for lnkd...

though maybe were completely off base here and theres something that were missing, but it really doesn't seem like it.

short lnkd+synthetic long?

Take a closer look at all of the components of put-call parity.

i guess the assumptions are European options (no), identical strikes & expiration (yes).

My trade was - sold the put, bought the call - generated immediate cash and had a hedged position. No issues with cash for margin requirements. End of market - the $85 put = $6.20 and the call = $5.20 - so also sitting on a gain on the options.

Cannot help but think that I missed some important risk here? Any opinions?

If all you did was write a put and buy a call, you would be utterly fucked if the stock tanked. The only way it's arbitrage is if you had shorted the stock to eliminate your risk. That's what I was alluding to above.

man that was a massive F***up ... dont know what i was thinking .. tx

Yeah, you're actually massively long right now with no downside protection. You're probably okay until Tuesday, but good luck just the same.

Enjoy your weekend, lol.

regardless of his trade here isn't there still an arbitrage opportunity?

c-p=s-pv(k)

you can essentially set the pv(k)=85, since with 1 month there is little effect of TVM.

then, you have 4.5-9=86-85

-4.5=1...so shouldnt you synthetically long the lnkd options (buy call sell put) and short the stock?

you can go long at 80.50 with the synthetic long position vs. 86 with the underlying, no?

edit--is the reason this exists because it is very difficult to short lnkd, therefore people are pushing the price of the puts upward and causing the deviation from parity?

You're still going to need to find a broker who will quote you on how much it costs to short the stock. Then you're going to have to factor in transaction costs (huge if you're a small retail investor). Then you're going to have to factor in taxes.

If it were really this easy, someone would have already done it.

Your edit is correct.

@leveRAGE I'd have to assume that's the case (no stock available to short, etc...). You're strategy is correct, assuming you could get the stock to short for the hedge. Unfortunately it sounds like the OP just did the sp-lc leg of the trade and left himself open to the downside. It's highly unlikely he'll get hurt (as long as he closes the position on the open Tuesday), but it sounds like a valuable lesson learned.

the borrow costs to short the stock are very high - i heard 90% being talked about on CNBC today .. dont know what it actually us. But what I did seems to be a cheap way of going long linkedin - but with a lot more downside risk since any downward movement of the stock would annihilate me on the "sell put" part of the trade.

In return - I collected a cash amount of $4.50 per contract up front. So I only face massive downside below a certain stock price (but then I have very significant downside risk once that initial cushion is eaten up)

posted my reply before Edmundo and buy's comments - hopefully what I said make sense

yup -- i was lucky today with this trade - got my head turned around when I was calculating returns ... def a valuable lesson learned ...

What you call "cheap," I call risky. Remember that your trade expires on the third Friday of June. Let's say the LNKD tanks on the next market open and stays in the tank all the way to expiration. Your losses are locked in. If you owned the stock outright you could just wait out the fluctuations in the market for a few months or years until you saw the profit.

Agree with the closing out the put part. Definitely dont want to hold downside risk till option expiration. Leaning towards just closing my position completely since i am sitting on gains on both legs of the option trade right now. Will need to do it market open on Tuesday.

Better to be lucky sometimes ..

btw since the float is so small on the stock and shorting so difficult - think it's likely that the stock will stay relatively stable short term

Yeah, I think you got away with one here. Congrats, it doesn't happen often, lol.

This just hit Reuters, by the way:

http://www.reuters.com/article/2011/05/27/us-linkedin-options-debut-idU…

something tells me you aren't going to be able to borrow at GC. You need to factor in that cost into your put call parity. In fact, if you ignore all other "real capital market" factors, you can even calculate the rate sec lending desks are charging with PCP

i think i understood the first part of your post regarding factoring in borrow costs into put-call parity - are you referring to figuring out borrow costs assuming put-call parity holds?

and yes Edmundo - started thinking about the trade when I saw the CNBC report on how expensive the puts were .. luck :)

"That's not even close to accurate. Not even in the same zip code. If the stock tanks you just buy back the puts to cover and you're out of the trade."

You're out of the trade, but you still took a loss on the trade. Sure, you can replace the trade by just going long the stock or rolling over to next months contract, but there's still more risk than simply buying the stock. Also less liquidity and higher transaction costs for that matter.

I have been trying to short LNKD for days. Not possible. I thought that this would happen (massive put-call disparity) but it's honestly impossible to short LNKD yet. w/e

Also, it's cheaper for me to trape options than equities at Schwab. idk why.

I think what we have here is a failure to communicate. I'm not saying it will offset the trade. I'm saying that writing short dated puts is riskier because you lock in your loss on the trade at the end of the month (or earlier if you exit the trade). By contrast, someone simply buying the stock can wait out the fluctuations that occur normally over three weeks.

This was a sick thread. Thanks, guys, for something more than, "I blasted my best friend's ex-gf, can I put this on my resume to land BB internship."

I gave you a Silv Bananer EB for some good contributions. Thanks.

I agree! That's the original point I was trying to make. I was just emphasizing that Aspirants trade might be riskier than he's perceiving.

Well, if it makes you guys feel any better (or more important), Paul Kedrosky himself checked in on this thread and commented to me (privately) how much he'd like to have guys like the OP on the other side of his trades. Aspirant, you're like Internet famous now, lol.

Hehe... Teaches me to make options Trades without paying close attention.. Should stick to what I know. . But seriously.. Thanks for the comments. Was helpful and educational!

Never short options as a combination strategy if you dont have time on your side unless you have extreme conviction.

With premiums this high, you probably need to look more on other factors to trade the options rather than just put call parity.

what a day for linkedin ....

Shit. Did you close the position? How did you make out?