Wednesday, February 02, 2011 3:38:31 PM
CCME - great sale. One thing I would say to everyone is this. I would not use Fernando's stock replacement strategy if you are a big player size-wise. Here's why:
The reason for the put/call disparity is that there is huge demand to short the stock, but there are insufficient available shares to do so. As a consequence, all the potential short sellers have to go to the options market to achieve their goals. Naturally, the puts skyrocket, but the calls do not, creating the arbitrage opportunity.
The problem is that when you sell your shares to get long synthetically, you are transferring the short sellers' desire to sell into the open market. By selling your shares, and then selling your puts to the short seller, you are transferring his short into the market. That further drives the stock price down, and is not good.
If naked shorting were allowed, the equilibrium stock price of CCME would be lower than it is. Put differently, if you include shorts, there are more sellers than buyers right now. But the sellers (the shorts) can't sell because they don't own shares and can't find borrows.
By executing the stock replacement strategy, you are helping to bring the stock down to where it would be if unlimited shorting were possible. The premium you get is the reward the market gives you for doing that. You are making the market more efficient, helping it overcome a skew created by the restriction on naked shorting--unfortunately that means moving the stock in the direction we don't want it to go.
To look at the matter differently, ask yourself, how could you get risk-free money with a stock replacement strategy? The answer is you short the puts, buy the calls, and then short the stock. You can then collect the premium at no risk. There is no way you can lose money. If the stock (which you are short) goes to a million, your call goes to a million to keep you at zero, and you collect the premium. If the stock (of which you own a put) goes to zero, the put will skyrocket--but you're also short that same move, so you're again neutralized, except for the premium that you collect.
BUT, notice that you can't go short, that's the whole point! You can't get shares to short, therefore you can't execute this strategy in a risk-free manner, that's why the condition can continue to exist.
To repeat, do not sell your shares to go synthetic long if you are a heavy long. I sold earlier and played this new approach, but after thinking things through I reallized what I was doing. Fortunately, I'm not a heavy long
You may make some premium money, but you will help the shorts tremendously by allowing them to express artificial selling demand (from shorting) in a market that otherwise would not be able to accomodate that demand (because there are no shares to short).
The reason for the put/call disparity is that there is huge demand to short the stock, but there are insufficient available shares to do so. As a consequence, all the potential short sellers have to go to the options market to achieve their goals. Naturally, the puts skyrocket, but the calls do not, creating the arbitrage opportunity.
The problem is that when you sell your shares to get long synthetically, you are transferring the short sellers' desire to sell into the open market. By selling your shares, and then selling your puts to the short seller, you are transferring his short into the market. That further drives the stock price down, and is not good.
If naked shorting were allowed, the equilibrium stock price of CCME would be lower than it is. Put differently, if you include shorts, there are more sellers than buyers right now. But the sellers (the shorts) can't sell because they don't own shares and can't find borrows.
By executing the stock replacement strategy, you are helping to bring the stock down to where it would be if unlimited shorting were possible. The premium you get is the reward the market gives you for doing that. You are making the market more efficient, helping it overcome a skew created by the restriction on naked shorting--unfortunately that means moving the stock in the direction we don't want it to go.
To look at the matter differently, ask yourself, how could you get risk-free money with a stock replacement strategy? The answer is you short the puts, buy the calls, and then short the stock. You can then collect the premium at no risk. There is no way you can lose money. If the stock (which you are short) goes to a million, your call goes to a million to keep you at zero, and you collect the premium. If the stock (of which you own a put) goes to zero, the put will skyrocket--but you're also short that same move, so you're again neutralized, except for the premium that you collect.
BUT, notice that you can't go short, that's the whole point! You can't get shares to short, therefore you can't execute this strategy in a risk-free manner, that's why the condition can continue to exist.
To repeat, do not sell your shares to go synthetic long if you are a heavy long. I sold earlier and played this new approach, but after thinking things through I reallized what I was doing. Fortunately, I'm not a heavy long
You may make some premium money, but you will help the shorts tremendously by allowing them to express artificial selling demand (from shorting) in a market that otherwise would not be able to accomodate that demand (because there are no shares to short).
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