options idea...

Here's a hypothetical scenario.

stock xyz is trading at 10.00.

You sell 10 contracts of june 12.50 calls at a price of 1 dollar each.

You buy as a hedge 10 contracts of july 12.00 at a price of 1 dollar each.

ideally the stock goes up a little, down a little but thats about it. the options you sell expire and you sell your hedge and your profit starts at 100% and goes down depending on how much your long hedge position depreciated.

If the stock takes a jump you will always be ahead b/c your hedge position is closer to the money and a month away from expiration.

If the stock dives to 0 your hedge becomes worthless, but of course so do the options you sold. So you dont gain or lose.

The biggest question of course is how could the june 12.50's be going for the same price as the july 12.00. My answer is that they SHOULDNT be, but if you found a case in which there was this kind of price discrepency...wouldnt this work?

 

Which company?

 

ha! ok ok i HAVE found one, but im not quite that naive.

 

You won't find such a case, ever!

 

This sounds like a lovely, lovely, Memorial Day dream.

It may appear as though you can buy this diagonal spread for zero, but if you try you will no doubt find it was a mirage.

To buy a call spread in the same month for zero - that would be more than unlikely. To buy one where the lower strike (buy leg) had a month more time remaining than the short leg - well, you can pretty much forget about it.

If it turns out that I'm wrong, please come back after the fact and let us know. I'd love to discover that such mispricings are still possible.

 

the June and July calls wont be trading at the same price of a buck

 

You are both naive and stupid if you think your order will fill.

 

Ok I just wanted to make sure that the main problem with the scenario is the misprice. I will tell you that they are out there. I've never found one that was trading at 100%, but ive found 3 or 4 that we're trading at 90%-95% despite being $1 further from the strike and a month closer to expy. What would you do if you found such a case?

 

oh and what would this strategy be called?

 

I would mortgage my house and buy all of these free diagonal call spreads I could. Then I would sell my firstborn and continue doing more. When that money ran out...

I wish you luck jonbig04. But I think you'll find that when you actually try to put this spread on, you'll find it wasn't really there at the price you thought it was - or anything even close.