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There's Some Nut Paying Up HUGE For Dec '12 Gold 5000 Calls ...

Makes no sense why they would pay $50-60 or so when 4000 Calls are going for $1.00-$1.10 or so (with 3500 calls going for about $1.50-2.00 & 3000 calls going for about $6).

i.e. if gold were to jump 1000 the 5000's should be priced like the 4000's are now (about a buck) & the 4000's should be priced like the 3000's are now (about $6).

Meaning that the 5000's will only increase about 100% with a 1000 move up in gold but the 4000's should jump nearly 500%.

Bottom line: they are WAY overpaying for the 5000's (probably by at least double right now) relative to the other strikes mentioned (assuming the others are not way UNDERPRICED).

Either way, there is a MAJOR opportunity for the spread trader as you can buy the 4000's and sell 2 5000's for a "free" spread and if gold were to finish at 5000 you'd be $100,000 in the money for EACH long 4000 (and you'd be "covered" up to gold 6000 if you did absolutely nothing on the way up). image

Personally, I'd split the difference and do a 1:4 ratio and pocket $100+ going in and pocket another $200 or so on the way out if it moved the G.

Just some fyi info for the homegamers to help with the calcs and risk assessment:
Current Dec' '12 3000 Call Margin (rounded to nearest $) - $1034
Current Dec' '12 3500 Call Margin (rounded to nearest $) - $394
Current Dec' '12 4000 Call Margin (rounded to nearest $) - $158
Current Dec' '12 5000 Call Margin (rounded to nearest $) - $47

So e.g. if you were long the 4000's & short the 5000's in a ration of 1:3 the margin of the 4000's would more than offset the margin of the 5000's (less your CFM's minimum per futures option) even if gold were to run up 1000 (or more)

i.e. the initial margin now would be $158-3*47 and with gold 1000 higher it would be $1034-3*158.

Comments

  • jmski52jmski52 Posts: 22,305 ✭✭✭✭✭
    Dang, Rick. Now I'm gonna have to go out and buy a WSJ or a Barrons just to play with the numbers.image
    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • roadrunnerroadrunner Posts: 28,303 ✭✭✭✭✭
    Is there a way to know if real or play money "paid" for those calls? Wouldn't put anything past the futures markets these days.

    Barbarous Relic No More, LSCC -GoldSeek--shadow stats--SafeHaven--321gold
  • jmski52jmski52 Posts: 22,305 ✭✭✭✭✭
    The "siren call" of sure profits.
    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • RR,

    ABSOLUTELY REAL trades. Check it yourself.

    R
  • roadrunnerroadrunner Posts: 28,303 ✭✭✭✭✭


    << <i>RR,

    ABSOLUTELY REAL trades. Check it yourself.

    R >>



    I know the trades are real. My question is whether the money is real. We already know through AIG, JPM, Lehman, Bear Stearns, etc. that there are numerous
    deals out there (esp via derivatives) that aren't real deals. At least not real to you and I. You know, funny money.
    Barbarous Relic No More, LSCC -GoldSeek--shadow stats--SafeHaven--321gold
  • Thye are probably using someone elses money like that turd Corzine did at MF Global ! image
  • RedTigerRedTiger Posts: 5,608
    I will not comment on the specifics because I don't trade futures or options on futures. I will say that in my time as an active stock option trader, there have been more than few times I thought to myself "that is free money," and got my head handed to me. The story may be a case where there was a single fat fingered trade at an outlier price, and the trade may even be reversed if the trader is well connected. If a little fish, no dice.

    Another thing that occurs on low volume option strikes is that bid/ask spread becomes so wide that it is near impossible to get fills. Sometimes various options do trade at prices where a person can virtually lock in an arbitrage. That said, in my experience, they tend to be small opportunities, not big ones, because the good price is usually only good for a few contracts. There are sophisticated computer programs that sniff for those kinds of opportunities, so many windows close quickly. Some other factors that make these "free money" trades not all that free, include the chance of missing a fill with a limit order, commissions, the bid/ask, the margin requirements.

    The post also reminds me of bookies or active football betters that equalize their bets if the spread moves in their favor. Say the point spread starts at 7 and then moves to 9. If a person bet giving 7 to start, they can now take the other side and get 9, and if the game closes right on that pin at 8, they win both ways. The odds of hitting it exact might be miniscule, but the lure of free money does tend to motivate some bettors. Like free money option trades, it tends to be pros that can take advantage of the point spread moves in football, because the vig cuts the little fish out of the picture. The equivalent of vig are the commissions, exchange fees, margin requirements, and the ever present bid/ask and size.



  • RedTiger,

    I agree with almost everything you said but I can almost assure you you can sell the 5000's for .50-.60 and buy the 4000's for about $1.00-1.10 (& the 3500's for about $1.50-2.00).

    Sorta hard to get hurt with a 1:3 ratio (i.e. credit in of at lest .40 less commissions) unless you wake up one day & gold is suddenly over 5,500 in one fell swoop.

    As noted, I can't see a way there won't be a further credit out if gold runs OR how you're not protected from a margin standpoint. image
  • Well, you can buy about all you want now at $0.10-0.20 ...
  • RedTigerRedTiger Posts: 5,608
    >>
    Current Dec' '12 3000 Call Margin (rounded to nearest $) - $1034
    Current Dec' '12 3500 Call Margin (rounded to nearest $) - $394
    Current Dec' '12 4000 Call Margin (rounded to nearest $) - $158
    Current Dec' '12 5000 Call Margin (rounded to nearest $) - $47
    >>

    The op seems to be confusing the price of the options with the account margin requirements for selling the options. At ThinkorSwim for equity options, the margin starts at 10% of the price of the underlying as the minimum margin requirement per contract sold. Futures have a different size and different requirements, usually lower than equity margin requirements, but still it ain't like the op outlined. Just for illustration purposes, for the gold ETF, GLD selling one call would involve a minimum margin of 10% of the current 100 share price per option sold as a minimum. In round numbers that would be 10% of $16000 or $1600 per call contract sold. Potential profit for selling naked calls is 100% of the price of the option. For GLD 500 calls one year out, my top of the head guess is somewhere between 2 to 10 cents per contract at the time of the op. The trade as outlined would boil down to putting up $1600 in margin in the account to sell each option, with the potential to possibly earn $2 or $10 for the entire year on that $1600.

    Again, the futures contracts have different sizes and likely lesser margin numbers, but I would tend to believe those numbers wouldn't be compelling in terms of risk vs. reward. A person can't sell one GLD 500 call with $2 or $10 (the price of the option) in their account, not anywhere close. I seriously doubt a person could sell the gold futures calls the way was outlined. Ratios get even more complicated, and depending on how the account is setup, the trade outlined in the op (buying 4000 calls, selling 5000 calls in ratio) might even be less capital efficient than selling one call, tying up even more capital to make even less money.

    Readers, options are complicated. Selling options, especially low value way out of the money options can be extremely risky because of the leverage that can be involved. Novices routinely get wiped out playing the options game with high levels of leverage--don't be one of them.
  • OverdateOverdate Posts: 6,902 ✭✭✭✭✭
    The Dec. '12 price really doesn't matter if the Mayans are right. image

    My Adolph A. Weinman signature :)

  • Red Tiger,

    The margins on futures options vary SIGNIGICANTLY from the margins on equity/secuity options (i.e. GLD) and are not suject to the minimums you allude to.

    My numbers were DEAD ON when posted.

    "The op seems to be confusing the price of the options with the account margin requirements for selling the options..."

    No.

    "...At ThinkorSwim for equity options, the margin starts at 10% of the price of the underlying as the minimum margin requirement per contract sold..."

    Probably correct but this DOES NOT apply to FUTURES OPTIONS. fwiw, the exchange minimum is 5% not 10%. If one is allowing a broker to impose a house minimum higher than the exchange minimum one is NOT a very savvy trader.

    "...Futures have a different size and different requirements, usually lower than equity margin requirements, but still it ain't like the op outlined..."

    Correct (as to the different margins on futures options) but you are WRONG re: what I outlined as it was taken from the margin impact of REAL orders.

    "...Just for illustration purposes, for the gold ETF, GLD selling one call would involve a minimum margin of 10% of the current 100 share price per option sold as a minimum. In round numbers that would be 10% of $16000 or $1600 per call contract sold..."

    If you are naive enough to use a broker that imposes a higher house requirement than one that only imposes exchange minimum margins than your example is correct AND THE REASON WHY ONE WOULD BE FOOLISH TO TRADE GLD OPTIONS INSTEAD OF GC OPTIONS. In addition to the margin disparity there is a higher transaction cost for an equal amount of underlying as well as a (usually) greater sum of slippage (i.e. bid ask spread).

    "...Potential profit for selling naked calls is 100% of the price of the option. For GLD 500 calls one year out, my top of the head guess is somewhere between 2 to 10 cents per contract at the time of the op. The trade as outlined would boil down to putting up $1600 in margin in the account to sell each option, with the potential to possibly earn $2 or $10 for the entire year on that $1600..."

    You are the most correct here as it would be about $5 per contract income (from GLD calls - as they are only for 10 ounces & GC is for 100 ounces) for about $1,600 margin tied up. What you seem unable to understand is that I WAS NOT advocating doing this trade with GLD options AND the margin tied up on GC options was SUBSTANTIALLY LESS THAN YOU OUTLINE FOR GLD AND you ignore the fact that as a spread the NET margin impact is/was near zero. As originally stated, the margin on a NAKED Dec' '12 GC 5000 Call WAS approx. $47 - NOT $1,600 and THIS amount WOULD HAVE BEEN reduced if you were ALSO long some number of 4000 calls.

    :...Again, the futures contracts have different sizes and likely lesser margin numbers, but I would tend to believe those numbers wouldn't be compelling in terms of risk vs. reward...

    Correct as to the reference to the differences but I argue that the risk/reward AND the margin requirement DID make this a compelling trade IN ADDITION TO HOW YOU COULD HAVE BENEFITTED FROM A RUNUP OF GOLD that would have widened the ratio in your favor.

    "...A person can't sell one GLD 500 call with $2 or $10 (the price of the option) in their account, not anywhere close...

    Agreed.

    "... seriously doubt a person could sell the gold futures calls the way was outlined..."

    You're simply wrong.

    "...Ratios get even more complicated,..."

    Agreed.

    "...and depending on how the account is setup, the trade outlined in the op (buying 4000 calls, selling 5000 calls in ratio) might even be less capital efficient than selling one call, tying up even more capital to make even less money...

    Again, you're wrong because it WAS more capital efficient (especially more so than selling GLD calls) than selling them naked.

    "...Readers, options are complicated. Selling options, especially low value way out of the money options can be extremely risky because of the leverage that can be involved. Novices routinely get wiped out playing the options game with high levels of leverage--don't be one of them...

    True that!
  • RedTigerRedTiger Posts: 5,608
    BigRick, I might be totally wrong, and a person can sell one GC 5000 call with $47 working cash in their account, but it sounds totally off to me. One GC contract is 100 ounces, so that one call is for 100 ounces. I can't see how the exchanges can allow a person with $47 working cash in their account to sell a naked call on gold at any strike, much less a ratio call spread as outlined. I would guess a person has to have at least $8000 in working capital to sell one naked call. That $8000 would be the margin requirement (again not the price of the option). I don't trade futures or the options on futures, but from trading equity options, selling way out of the money calls is one of the least capital efficient ways a trader can proceed.

    Maybe you can point out the working capital needed to sell one GC 5000 call and the math will make more sense to me. I am seeing putting up $8000 cash money, to sell that GC 5000 call, tying it up for one year, to possibly earn a max of $47.
  • It's still playing in thier ballgame where they make the rules and determine the winners and losers.

    My guess is you pay if you lose and get some BS if you win. They run a crooked game and we all should know that by now.
  • RT,

    I'm sorry you are not aware that the CME Short Option Mininimum Performance Bond on gold futures options is only $40 initial & $30 maintainance. Sounds like you've been missing some opportunities:

    http://www.cmegroup.com/clearing/margins/som.html#e=CMX&a=all&p=all

    CME Minimum Performance Bond (i.e. Margin) Requirements For Gold Futures Options

    So, AGAIN, yes, my argument was that if you were able to find a gold futures option that was so far out of the money so that its margin was basically the exchange minimum the numbers WOULD work from a cash tied up, risk/reward, cost benefit standpoint. Furthermore, with the spread position, not only EVEN IF gold had run to the upside would you STILL be covered from a margin sdtandpoint BUT you would hope to be able to close the position FOR AN ADDITIONAL CREDIT OVER AND ABOVE THE CREDIT YOU CREATED WHEN YOU OPENED THE POSITION due to the ratio of prices between the long & short options moving IN YOUR FAVOR AS THE LONG STRIKES GOT CLOSER TO IN THE MONEY.

    Yes, trading GLD options from a sell side is absolute idiocy (from the margin requirement standpoint - as well as the previously mentioned transactions costs/slippage standpoint) when you can trade a nearly identicaly perfect substitute with GC options - of course with the proviso you are willing to transact on 100 ounce increments of underlying instead of 10.

    So, in conclusion, yes, you need to have a MINIMUM amount in your account (depends on the broker) to sell futures options (Optionsxpress has either no minimum or $1-2k) AND have enough in excess liquidity to cover the INITIAL margin on the futures option, but, YES, you can do it AND have as little as $40 of your equity tied up (arguably even this amount can be offset but I won't go into it here).
  • percybpercyb Posts: 3,301 ✭✭✭
    The person could be a seller, not a buyer...
    "Poets are the unacknowledged legislators of the world." PBShelley
  • Correct, the margins are for a SELLER - a buyer only need put up the price of the option.

    The CME clearly states that the margins are the SHORT OPTION MINIMUM - aka SOM - so CLEARLY they refer to a SELLER.

    So YES, you can sell GC options with as little as $40 margin tied up (again, with possibly even this amount effectivle net offset).

    In fact, if you check the margins on substantially identical (i.e. strike & closest expiration) GLD & GC options you will find that the GC options, even though they are for 10 times more underlying (i.e. 100 ounces vs. 10 ounces for the GLD), are in the majority of cases SUBSTANTIALLY less than GLD ("near" or at the money being the exceptions - but can never be more than the futures contract margin) BUT when you equalize the quantities - i.e. calculate the margin required on 10 GLD options vs. 1 GC option, GC options are ALWAYS less margin and in fact for fairly comfortably out of the money options astronimically less (the GLD 500 call margin - 10 x $1,600 = $16,000 - vs. the GC 5000 call margin of a mere $47 - being a perfect example)! image
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