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Dennis,
I absolutely agree with you that I should have chosen the wording you
suggest.
If kindly disposed, you might consider that I did write "aside from brief
imbalances" which was intended as a "hedge" against the very points you
mention. As an option trader, I always like to have some insurance. :-)
Regards,
Michael Suesserott
-----Ursprungliche Nachricht-----
Von: DH [mailto:catapult@xxxxxxxxxxxxxx]
Gesendet: Friday, December 15, 2000 20:55
An: realtraders@xxxxxxxxxxx
Betreff: Re: [RT] Trading Events - Option Equivalents
Nice post Michael. Thanks. I do have one small concern. You wrote:
> Stocks, puts, and calls are subject to one
> fundamental law: the price difference between the Mar 60 call and the Mar
60
> put will always equal the price difference between 60 (the strike) and the
> stock price at that moment. If they get out of line even briefly, a floor
> trader can immediately take a riskless profit by arbitraging them back
into
> line.
I get nervous when I see the words "always" and "immediately." I would
substitute "tend to" and "eventually."
I trade futures, not options, but given the relative liquidity of the
two, I'd expect inefficiencies to be an even bigger problem with
options. When you are actually putting money on the line, those brief
inefficiencies can cost you a bundle if you're not careful. Execution
risk I guess you could call it.
The gif shows the spread between the Naz futures and the NDX cash. The
"law" says that should be relatively constant over the course of a day.
Clearly, from the picture, the exact instant that you pull the trigger
to put on a spread can make a huge difference in your profitability. As
much as 25 points or $2500 per contract.
On a longer-term option hedge, what happens when it's time to cash in
those deep in the money options and the volume on them has dried up to
near zero? Somebody will take them off your hands but, most likely, only
at a steep discount. Y'all be careful out there.
--
Dennis
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