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Strategies & Market Trends : ahhaha's ahs -- Ignore unavailable to you. Want to Upgrade?

To: CapitalistHogg™ who wrote (8757)	12/22/2006 12:11:30 PM
From: GraceZ	Read Replies (1) \| Respond to of 24758

I have a good friend who worked in a small trading firm doing exactly the kinds of setups you described here. They had it all worked out on an Excel spreadsheet incorporating Black Scholes with exactly how much of the common to short and how many options to sell or buy to hedge at each price and volatility range, at each point in time as the options approached expiry. It worked out great over and over until one day it didn't and the trader who was the most successful at this strategy got taken out and took everyone else with him since they pooled their capital. The risk, as ahhaha correctly pointed out, is that the positions aren't completely offsetting, hedges rarely are like seesaws. Short positions have margin requirements that aren't necessarily offset with calls or short puts. If you have to sell the call options to satisfy the margin you can't reasonably guarantee that the price you should get in light of the stock price is the one you will get since price is indicative of instantaneous demand and market state which isn't predictable because there is a person on the other side of whatever trade you need to do. You have much more capital at risk than you think you do, maybe more than you have access to and all it takes is a Black Swan event to knock you back to the Stone Age even if your strategy is destined to be a win at expiry. Black Swan events happen far more frequently than traders think they do. Traders come in two varieties those who set up these low risk strategies, I like to think of them as perpetual motion schemes, that have a high probability of winning small amounts of money over and over. This describes the majority of traders and why most go broke. Trading is a minority game, it takes a lot of losers to pay off a winner. Then there is the more rare type, a trader who predictably and repeatedly loses small amounts of money in order to make bets on a low probability event that pays off large. The guy who gets the regular pay check over and looks at the habitual loser as a chump ("I though you were smart") and most likely this is a guy who will continue to make money day in and day out until he gets taken out by the Black Swan event....then he quietly disappears. The trader losing small amounts of money repeatedly, the one who engages risk repeatedly, while waiting for the Black Swan event to work in his favor is much more likely to be around in five years. That guy along with people who are investors, people who seek to profit from the rise in real value of the underlying asset. One bets on a company by buying and holding its common and lo and behold, the company grows like gang busters. You get rich without the necessity of someone else going bust.

To: CapitalistHogg™ who wrote (8757)	12/22/2006 2:06:16 PM
From: ahhaha	Respond to of 24758

I guess you guys don't understand what I'm talking about, when I say words like arbitrage. When I say a pure arbitrage I'm specifically talking about simultaneously buying and selling an asset that yields a risk free profit. We don't know what you mean by arbitrage. What I was trying to determine by asking questions on this board were "where is the risk?" Where you can't see it but discover it from time to time when you don't want it to appear. So far no one has correctly identified the risk. Just about everyone has. Pi said the risk came from the market's tendency to discover rigidity, Ron said, from instability of initial conditions, gladman said from the recognition by exploiters of the existence of an apparent "perfect" spread. Grace from stationarity of boundary conditions. Essentially there was no risk in this play because of the spread between the assets. Did I not admit the spread would probably work? With a little risk taking you could have made a killing by simply betting on what you proposed was someone's attempt to put together a big bet on the down side. All you had to do was buy 2 puts or so. KISS. There is absolutely no arguing against my point. Above you said your point was to discover where the risk in that spread was. How could there be an argument against an attempt at discovery? What does that mean? The trade values given speak for themselves. If making 15% annualized risk free is something you aren't interested in, then so be it. Correct. I'm not interested in making a paltry 15%, in ANY time frame. The only point to be made about this set up is that it would have been difficult to execute simultaneously because the stock shares were hard to borrow. See. We don't know what you mean by "arbitrage", and, apparently , neither do you. By the way, the stock wasn't hard to borrow, as I pointed out. It just depends upon whether you have a broker's pocket so that they will borrow stock in the great material naked continuum for you.