There is an opportunity for average everyday people to engage in a little risk arb. We learned about it in class. Basically it involves lowes trying to clean up all the little guys with less than 100 shares by having them tender. There is little out there in google land about this and apparently its a pretty regular occurrence.
The teacher set up the trade and I was fine till he started hedging his position with options then my eyes glazed over. I HATE being the guy that’s like “duh I don’t get it”. I was hoping someone here would recognized what I was talking about and could write out an explanation (cause I’m MUCH smarter when I’m reading).
If you want to hedge a long position in a stock, you either need to write calls or buy puts. The number of calls or puts depends on the delta of the option. Delta is how much change in option value relative to a change in the underlying asset. Gamma is something else than needs to be taken into consideration, but its not as important here for a simple explanation.
Say delta for a call = .5900 The proper amount of calls to write is the # of shares divided by the delta of the call. 100/.59 = about 169 calls that you need to write to hedge your portfolio.
However, as the underlying changes in price, so does delta so you need to re balance your portfolio by either writing more calls or reducing the amount of calls you have written.
Hope this helps as a start.
Yeah that I get and I'm up on my greeks. What I tripped up on is the need for the hedge. The opportunity is actually sitting out there right now.
http://finance.6abc.com/abc?Account=wpvi&GUID=5423391&Page=MediaViewer&…
I know this opportunity is a variant on risk arb but my book on risk arb SUCKS because there are no good examples in it.
In my head I'd get long LTR and short .7 CG. BUT in addition to that he had us buy the 55 put on LTR. THAT I didn't get. Seems like it would mess up the P&L. The whole trade is called odd lot protection. Ever hear of it?
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