Conversions
I recently purchased McMillan's "Options As A Strategic Investment"
and became particularly interested in conversions as outlined in
the section on arbitrage.
I realize that inefficiencies that provide conversion opportunities
are traded away by pros with fast computers but I believe I found
one. The options had volume and the quotes were delayed 20 minutes at about 2:00pm today. Someone tell me where/if I am wrong:
Source Media Inc. (SRCM)
Security BID ASK
SRCM 21.4375 21.625
SRCM OCT 20 CALL 5.5 5.75
SRCM OCT 20 PUT 3 3.375
So, for 10 contracts and 1,000 shares:
Buy 1,000 SRCM @ 21.625 ($21,625.00)
Sell 10 SRCM OCT20 CALLS @ 5.5 $5,500.00
Buy 10 SRCM OCT20 PUTS @ 3.375 ($3,375.00)
Cost of the position: ($19,500.00)
downside protection from buying stock & selling calls:
$5,500 - ($21,625 - $20,000) = $3,875
$$ left after buying puts:
$3,875 - $3,375 = $500
This doesn't include carrying costs.
Cost to carry $19,500 for approx 3 months:
$19,500 * (.07 / 4) = about $350.00
That leaves $150 for commissions and _maybe_ a profit.
Not much. I wonder though if it is a strategy that low-cap
traders with maybe just enough for a margin account could do.
Since I found this example just browsing, perhaps there are
opportunities that become available that would be better?
I'm also not sure about the mechanics. How would contingency
orders be pieced together to ensure the specific prices?
Are there any brokerages online that would have fast executions
over the web?
Let's all get rich,
Erastus |
