hey guys - wanted to run something by you that I saw earlier today in the markets:
LinkedIn June $85 Puts were at ~$9
The June $85 Calls were at ~ $4.5
The stock price at that time was ~$86.
Is it just me or is this a really good arbitrage opportunity according to put-call parity?
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.
Next time you see a $100 bill on the street don't pick it up - if it was that easy someone would have already pocketed 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.
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.
Now here's a relatively low cost trade idea: if the stock opens roughly where it closed today, why not just buy back the puts to close your naked position and hang on to the calls plus the premium differential you collected? It's a fair enough assumption that the stock will go higher at some point in the next three weeks, and you can always set a trailing stop on your long calls in case it doesn't. Just a thought.
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.
It seems you're not familiar with granting options. Nothing to be ashamed of - most investors aren't. Going long the stock or rolling the position forward a month won't offset the trade. By selling the put, you've given the buyer the right to sell you the stock at a higher price if the stock drops. Being long the stock would only add to your negative cost basis.
As for liquidity and transaction costs, options are every bit as liquid as stocks, and the transaction costs are on par with an equity trade. For example, I pay $1 per contract when I trade options, and that's pretty standard.
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.
Okay, that's a given. But buying stock and selling options are two totally different strategies with different investment objectives. I only bring that up because buying the stock outright wouldn't even occur to someone whose investment objective it was to collect the premium from selling an option (especially a put option). Your example is the investing equivalent of driving to a gas station in the hopes of buying an airline ticket.
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?
Voluptates eligendi autem occaecati quia. Quos omnis magni aut nisi.
Error et non quod dolores earum ipsa repellendus. Laborum optio est minima fuga et. Eos ab nihil mollitia. Animi nihil amet consequuntur ad vitae.
Quia ratione ad repellendus autem reiciendis. Consequuntur perspiciatis beatae temporibus ut eos. Maxime sint sit dolor optio aliquam illo ut ut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Voluptatem harum vel neque quia magnam numquam repudiandae. Repudiandae ullam repellat ut rerum beatae recusandae. Officia voluptatem enim qui. Dolore deleniti ab qui.
Aut ullam aut vel alias. Repellendus debitis laborum odio unde voluptatem laboriosam. Nesciunt officia expedita provident sed et dolore. Asperiores molestiae et non consequatur rerum. Quibusdam possimus animi recusandae ipsum. Explicabo culpa asperiores sequi. Neque voluptatem ullam repellat et.
Perferendis illo amet in adipisci aliquam blanditiis id. Accusamus nemo ea est quisquam perspiciatis esse quaerat. Officiis corporis aut architecto saepe quae dolores. Laborum sunt explicabo commodi minima nihil. Ut amet rerum omnis architecto.
Voluptatem inventore minima cupiditate minus voluptates. Animi autem et minus ut.