First off a IV/HV metric I developed pointed NFLD out as an binary event driven play. The event is NFLD's lead product candidate PolyHeme, a blood substitute, in phase III trials. Currently we are waiting for Top Line results that are due any day.
Then take a small long position in the stock and hold it. If the stock drops, do nothing. If it backs off, add, when, as and if, your fundamental conviction increases.
From there I noticed the difference in the put/call Volatility skew that showed the arb.
Yawn. Tells you nothing. Only tells you what a collection of guesses cause. Do you want to speculate on someone else's speculation?
Assuming TL results come out before Jan. expiry I would probably wager 40-50k.
Don't do that. Buy 200 common with cash.
But I've never done this (arbitrage) before and I'm positive I must be overlooking something!
Then you must set up a table with integer stock prices from 10 to 20 with each position's net under each of the prices at expiration. The resulting profit profile will tell you all the possibilities. Beyond 10 and 20 you will see asymptotic results almost equal to those at 10 and 20.
One thing I figured was, let's say the stock trades to $14.80 on the DEC expiration. The arb guy is short the stock and short the $15 puts and long the $15 calls, the $15 calls expire worthless but the guy who owns the $15 DEC puts decides not to exercise them. So come Monday, the arb guy is still going to be short the stock, and has no upside protection as his DEC 15 calls expired. Meanwhile, NFLD decides to announce blockbuster results Monday morning... the arb guy is now screwed. But this is December where it is a real possibility. January is a completely different animal.
You shouldn't engage in this kind of thinking. It's counter productive since things will very rarely play out the way you think. Right way to be involved with the stock market is buy a little now. Then buy more if things develop. Sell if things don't. Keep your losses small. A stock has to prove itself. Until it does you should keep your commitment small. The only kind of trading that's justified is the kind where you're trying to put together a meaningful position. This entails buying and selling which either ends up with you all out or plenty in. In a rising trend you should add when the stock appears to be headed straight down. It's hard to do. It seems risky. |
