How I Used Options to Set Up a Virtually Risk-Free trade
By - fuzz11
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This looks like a classic box spread and has been done many times and fucked many people. The largest mistake is forgetting about early assignment which will margin call you on the entire trade.
1R0NYMAN - “It’s risk free money”
Narrator voice - “Proceeds to lose 2000%”
I fucking thought this was the “it literally can’t go tits up” play
Can someone explain to me why this is downvoted?
Yeah like I mentioned in the post, the risk isn’t so much early assignment because a short position is synthetically the same as the short 45c. The main risk is getting assigned and then having your broker auto-close the assigned short position. I reached out to my broker and communicated my plan and they assured me they would not auto close a short position before I could handle it.
Or your short is assigned and the price gaps down the next day. Either way, wrong subreddit.
If the price gaps down then the short position makes money. Quite literally all price risk is covered here. It’s just broker imposed risk by closing out one of the legs. Additionally, the creator of this subreddit reached out and asked me to post this here
The 45$ long put is so otm, it will make no money compared to the near 1$ delta you lose from your short deep itm put tho
The short 280p has $19 of extrinsic value, so it covered every move upwards on a dollar for dollar basis with a $19 cushion. The 45c has no extrinsic value so it’s the exact same as a short, down to $45, which is where I added the 45p to cover moves on a dollar for dollar basis below 45. The 240c cover a move above the 280 strike on the short put. You can take a look at the screenshots posted from modeling this out. There is objectively zero price risk here due to the difference in extrinsic value on the 280p and the premium on the 240c.
If you want to address the broker imposed risk portion that is a fair criticism, but there is no price risk on this trade as it’s set up
I understand. My point is, If you're itm call is assigned, you're at basically break even. Say the next day the price gaps down $20. You now lost $2k from the deep itm short position. Now your $45 put gained almost nothing because the price is still so far away from the strike is all I'm saying. Otherwise you're right, if you're never assigned you can make free money.
I guess where I’m not following is where you say a short position loses money if the stock goes down. If the stock goes down, a short position makes money.
Short means to sell. Long means to buy. Short call = sold calls
Long call = bought calls.
Short put is the deep itm put you sold which you lose money If the price goes down since it's worth more now than the price you sold it at for credit.
Correct. That one wasn’t at risk of assignment. The 45c I sold is at risk of assignment. Assignment would result in a short position on shares of the stock, which would behave the exact same way as the short 45c, which was acting as a synthetic short. If the stock dropped that position would make money, regardless of it it was a short 45c or 100 short shares
It looks like they were assigned and it didn't impact the trade at all
what thetagang will do to a mf
why are you posting this on every sub?
Fo’ the karma mah boy!
This flew over my head, but i like the zero risk part
Im new to options. What perhaps are the odds that the other party would exercise early? Or what would the stock probably be around for it to be LOGICAL to exercise early?
this is a classic box spread, and people have lost alot of money due to theta gangbang and IV crunch... robinhood banned this strategy lol
I like your video. Thanks for your insights. Basically you need some sort of volatility for this kind of play to work?
Not so much volatility, but the skew of premium towards puts is what really provided the opportunity. Extrinsic value on identical strikes is typically the same. In this situation there was a $17 difference that allowed us the opportunity
How so you find these "skewed" option plays?
Great question and that’s something I’ve been working on. In plain English it’s when the extrinsic value of a call or out is greater than the extrinsic value of a call or put at the same strike. Ive had some issues finding more of them because the scanner I use isn’t properly pulling in extrinsic value
Yes, Greg- it looks like another “jump in the casket cuz that’s where the comfy pillow is”. Dude, this trade can go south on you super quick.
There only risk was getting assigned on the 45c and having my broker auto close that position, which they assured me that they wouldn’t
Ah the classic box spread on margin. Can’t go tits up.
Hahahaha risk free
Just hodle is all I know
Forgive me if I'm wrong, but isn't early assignment a major risk here?
Absolutely. Addressed that in the second to last paragraph. Assignment itself isn’t so much a risk because 100 short shares is synthetically the same as a short 45c. The risk is that the broker auto closes those 100 short shares, which would throw off the trade. I contacted the broker and they assured me that they would not auto close the position
It's amazing what can masquerade as sound advice these days. You're going to make someone go bankrupt, take this shit down.
Would be happy to address what you feel is dangerous. I discussed the assignment risk and stated how I mitigated it
I wouldn't call assignment one little catch. If you have a day job and you aren't paying attention, this will fuck you up.
You can’t be assigned during the day. You would know when you woke up the next morning
Glad you made money, but perhaps it would be good to highlight and bold the assignment risk at your edit. In addition, your strategy only works if you can price the entries of the puts and calls extremely well so that should be another highlight.
It’s pointed out at the top and at the end. Additionally, there was a huge cushion in the option pricing to enter this trade. I could have gotten a $2-3 worse fill on each leg and still been in a position to have zero price risk
I would assume people don’t really understand the extrinsic value difference part. The pricing would be a very significant factor in the profitability of the strategy.
Did you leg into the trade? If so, what order were the contracts purchased in?
Also, look at your p/l if the price went to $240 and stopped there. It would be a massive loss.
I didn't necessarily leg into them but they were opened one after another in about 30 seconds. Additionally I'm not quite sure what you're seeing but the price going to 240 and staying there would have resulted in a roughly $3,000 profit. There was zero price risk on the trade.
The overall premium you received would be 100*(2*138.60 + 2*113.60 - 4 * 1.88 - 2* 0.05) = 49678. If the price went to $240, then your loss would be 200*(240-45) + 200 *(280-240) = 47000. So, I agree the only risk would be due to legging into the positions. It was a good find, but I would have executed all these once. Perhaps, the brokers would see this as a riskless trade and refuse to execute it? It would be worth experimenting. I thought these arbitrage opportunities have mostly vanished by now, but I guess it's worth writing a scanner to find these now.
Another risk to consider is the borrow fee that would be incurred due to assignment, but I'm assuming that couldn't matter much if the options are short-dated to expire. The pin risk seems pretty low so you could probably just let these expire without much concern.
Let's look at this leg by leg if the price finished at $240
-2 45c would be worth $195. I sold them for $113.60 so this would result in a loss of $81.40 x 2 contracts so **-$162.80 loss** on this leg
-2 280p would be worth 40. I sold them for $138.60 so that's a gain of $98.6 x 2 contracts so **+$197.20 gain** on this leg
4 240c would expire worthless. $1.88 x 4 = **-$7.22 loss** on this leg
2 45p would expire worthless. $0.05 x 2 = **-$0.10 loss** on this leg.
So altogether you have -162.8 + 197.20 - 7.22 - 0.10 = +$27.08 if UPST expired at exactly 240. That's a $2,708 gain as opposed to the loss you came up with. So again there isn't a price that this could have expired at which would have resulted in me losing money.
As discussed above the only risk was a broker-imposed early assignment risk where I would get assigned on the short 45c and the broker would auto-close my short position. I discussed this up front with them to ensure that it would not occur.
The spreads on some of these ITM options was really wide so getting it all executed in one trade was proving very difficult. That's why I did one after another as quickly as I could.
Put call parity