Trading for stock options and futures arbitrage


So you got to square off the futures position on this date as well. The payoff will be there as long as there is an arbitrage opportunity.

Dear Sir, If I sell next series future and buy this series future. What are drawbacks in this strategy. Yes, STT is applicable. Check this — https: Please explain iron butterfly and condor with example.

I am not able to find anything on varisty, however its has been mentioned in orientation that we will explain. These are the last lines in the above chapters.

For options we can exit by buying back the sold share or selling the already bought share just before few minutes of the expiry to get off the STT trap but however how can we exit from the futures contract? As it will end on the expiry day itself. Is my understanding in both the points right?

You can exit all derivatives positions before expiry if you wish too. However, it certainly makes sense to exit the ITM options before expiry for reasons stated here — http: But do note, futures position is not affected by STT. So you can continue to hold them to expiry. Today I stimulated arbitrage in nifty and as per excel sheet it is showing Please check this — https: Thanks and regards, Samir. Dear Nitin sir, is it a good strategy to long future of nifty and sell corresponding call and vice versa as strategy equivalent to stock backed call or will it be naked risky to do so.

Naked options are always risky. If you are not willing to expose yourself to so much risk, then yes, hedging is a good practice. An ITM option will always expire at a price lesser than the intrinsic value. Sir is it possible to create an arbitrage opportunity by entering into Call, Put and Futures at different points of time?

For example, the option prices are always high in beginning of contract so short the put option then, and as time passes, buy call option and futures at a lower price? Would that be possible? I know that it is not possible to predict option movements, but what do you think of this sir?

Yes, in fact, there is something called as a box strategy, involving 4 option legs which mimic 2 futures trades. Sort of an arbitrage, do check it out. First of all, thanks for the reply sir. From what I understand, it is possible to create an Arbitrage opportunity and that the box trading system is a limited and risk free profit strategy.

May I ask, what are some others strategies like this one, or which book deals with them? Yes, the risk in box is execution risk. Assuming you execute the trade at the right prices, you can capture the risk-free profit.

Sir that was a fascinating book and thanks for the recommendation. I have two questions 1. Have ever executed the box strategy and what can you say about that? If we manage to convert it into an automated trading system, it would be like you said, a money machine, or am I missing something? Sir thank you so much for pointing me toward option volatility and pricing, it was a treasure.

I have developed a trading system based on Box strategy. However, I have not done this before and am having problems with backtesting the same. What do you suggest I do now? So do backtest or at least get an insight into its behavior. In the worst case, take it live, with small quantities and scale it over time. Sir about Box Spreads. Have you ever been able to successfully execute it?

Also, can you give me some pointers regarding the execution of Box strategy and other such Execution risk involved arbitrage strategies? Very cumbersome since it involves 4 legs. A lot of execution risk as well. I am a great fan of Karthik Rangappa and Varsity. Tried to create a google excel sheet which will get automatically update every 1 hour to find these kinds of opportunity. If interested people can refer to https: When will I be able to earn profit as per showing in excel.

So when will I earn this? Do I need to keep this position open till expiry to earn Rs. Is it difference of spread on expiry day while closing position or 20 Rs. Arbitrage involves buying and selling the same asset simultaneously across two different markets, with an intention to make a risk free or relatively low-risk profit. You buy call and either sell fut or sell equity ,is there any possibility to price difference and grab it ,is it arbitraging or not?

And what is a future scope of arbitrage opportunity if algo software comes in picture and technology improve. It is a sort of an arbitrage if you Buy spot and sell Fut. I think the abr opportunities especially the ones which involves fast information flow is kind of diminishing simply because systems are getting faster and faster shrinking the opportunity universe.

Let us consider a few market expiry scenarios — Scenario 1 — Market expires at below ATM At , the CE would expire worthless, hence we would lose the premium paid i. However we have paid as premium hence we experience a total loss of 80 PE — the option would expire OTM, hence we get to retain the entire premium of On one hand we make 80 and the other we lose Hence we neither make nor lose any money, making the breakeven point for this strategy. Further, here is the payoff at various expiry levels — And when you plot the Net Payoff, we get the payoff structure which is similar to the long call futures.

But if things change, so will your profitability, let me list few things that could change — No Fish opportunity risk — Assume one day you go to the market to buy fish at Rs. Then you have no opportunity to make Rs. No Buyers liquidity risk — You buy the fish at Rs. You are left holding a bag full of dead fish, literally worthless! What if on a bad day you happen to buy at and sell at ? You still have to pay 20 for transport, this means instead of the regular 30 Rupees profit you get to make only 10 Rupees, and if this continues, then the arbitrage opportunity would become less attractive and you may not want to do this at all.

Transport becomes expensive cost of transaction — This is another crucial factor for the profitability of the arbitrage trade. Imagine if the cost of transportation increases from Rs. Clearly the arbitrage opportunity starts looking less attractive as the cost of execution goes higher and higher. Cost of transaction is a critical factor that makes or breaks an arbitrage opportunity Competition kicks in who can drop lower? Now imagine this — So far you are the only one doing this trade i.

Both of you buy at Rs. Who between the two of you is likely to sell the fish to the buyer? Clearly given the fish is of the same quality the buyer will buy it from the one selling the fish at a cheaper rate. Assume you want to acquire the client, and therefore drop the price to Rs. In the whole process the price keeps dropping and the arbitrage opportunity just evaporates. How low can the price drop? Obviously it can drop to Rs. Beyond , it does not makes sense to run the business Eventually in a perfectly competitive world, competition kicks in and arbitrage opportunity just ceases to exist.

In this case, the cost of fish in neighboring town would drop to Rs. Here is an example that will help you understand this well. On 21 st Jan, Nifty spot was at , and the Nifty Futures was trading at Going by the arbitrage equation stated above, if one were to execute the trade, the positions would be — Long CE Scenario 1 — Expiry at The CE would expire worthless, hence we lose the premium paid i.

Scenario 2 — Expiry at The CE would expire worthless, hence we lose the premium paid i. Consider this — Brokerage — if you are trading with a traditional broker, then you will be charged on a percentage basis which will eat away your profits.

So on one hand you make 10 points, but you may end up paying 8 — 10 points as brokerage. However if you were to do this trade with a discount broker like Zerodha, your breakeven on this trade would be around points. If you are long on an ITM option which you will be then upon expiry you will have to pay a hefty STT, which will further eat away your profits.

Please do read this to know more. Other applicable taxes — Besides you also have to account for service tax, stamp duty etc So considering these costs, the efforts to carry an arbitrage trade for 10 points may not make sense.

January 28, at January 29, at 2: February 3, at 3: February 4, at 5: February 10, at 3: March 13, at 9: March 14, at 7: January 29, at 6: January 30, at 6: January 31, at February 1, at 6: January 31, at 1: February 1, at 9: February 2, at 5: August 27, at 9: August 28, at 8: February 2, at February 3, at 6: February 4, at 4: February 4, at 9: February 5, at 5: February 6, at 2: February 6, at 6: February 7, at February 7, at 3: February 8, at February 10, at 6: February 9, at 1: February 11, at 2: February 11, at 5: February 13, at 3: February 12, at 5: April 15, at June 4, at 5: June 5, at 5: July 20, at 2: July 20, at 5: July 22, at 2: July 22, at August 11, at August 12, at September 2, at 8: September 4, at 8: September 8, at 5: September 8, at September 9, at September 10, at 8: October 13, at 9: October 14, at February 4, at 3: February 5, at 8: April 8, at 1: April 9, at April 26, at 7: April 27, at May 21, at May 22, at July 2, at 7: July 2, at 8: December 31, at 6: January 1, at 6: Sir, What is the advantage of only synthetic long?

Just long call is having unlimited profit and limited loss. Secondly, to maximise the profit the difference between strike price and future price shall be more and difference in the premium of the CE AND PE shall be minimum. On its own the Synthetic Long is just like futures. But you can use this to identify and structure an arbitrage trade as explained in the chapter. Hi kartik Appropriately, almost for all nifty options the premium was roughly rs.

So in a trend please suggest me whether it is wiseful to write a deep itm option and collecting big premium in single trade or Selling atm option for every fall then exiting position and writing next ATM option and then exiting and so on doing when the trade lasts Or whether premium declines more fast in otm or deep otm.

See unfortunately there is no 1 strategy that suits all, everyone has different risk reward perspective and hence what works for me will never work for you or vice versa. Taking real market example. No profit or loss can happen.. But what will happen on expiry day?

As feb expiry has to happen with the spot rate which is way higher than feb future? What strategy Can I use to shift on expiry day and pocket the difference between these two futures..? On the day of expiry in Feb, the spot and Feb futures will converge to a single point, this does not guarantee the convergence of March futures, so this is a bit tricky.

Is there any automated software that can let me know the arbitrage opportunity live. Because EOD prices may or may not be relevant on the following day. If available what will be the approximate cost. Or any info about who sells such software.

Using Excel and nseindia will not be of much use because the prices are too delayed. Lakshmi — not sure who provides this. If you are familiar with coding you can build this yourself very easily using Kite Connect APIs — https: If yes it makes mobile trading mush easy and efficient.

Hi kartik Very very thanks for clearing my doubts on option writing. I have send friend request to you on Facebook. I am glad if you accept. Hi kartik, Since I learn in futures module, in future MTM position closes daily and broker buys next day.

So in future can we get benefits of gap up or gap down , since we get such benefits in option world. Gap up or down is a directional aspect, you will get benefit of this.

In futures you will experience it via MTM and in options the Delta will do the trick for you. Hi kartik, If I sell nifty future at on Monday and on Tuesday market opens at and on opening I close my position. Then can I get benefit of rs. I really appreciate your efforts. But I have one doubt. In arbitrage set up, Scenario 1: Means nifty spot You considered we short Nifty futures at when Nifty spot was , means there is 12 points difference in Futures price.

When you considered nifty closed at then you subtracted Nifty spot price i. But when spot is at futures must be at 10 to 12 points more. Please guide if I am thinking wrong. Is it not offering any arbitrage opportunity? You talked with only ATM in this regard. The trick is to make sure you are completely hedged out of the deltas when you initiate the position. With ATMs the call delta negate the put deltas. But with OTM it will not.

After 2 trading sessions future is compared with Sir whats the logic behind it then? Hello, thanks for explaining these strategies in such a simple way. Now future is going to expire on 25th Aug so if i execute the above trades, options will be expired today but if i square off my future trade also is it going to give me the same result?

So you got to square off the futures position on this date as well. The payoff will be there as long as there is an arbitrage opportunity. Dear Sir, If I sell next series future and buy this series future.

What are drawbacks in this strategy. Yes, STT is applicable. Check this — https: Please explain iron butterfly and condor with example. I am not able to find anything on varisty, however its has been mentioned in orientation that we will explain.

These are the last lines in the above chapters. For options we can exit by buying back the sold share or selling the already bought share just before few minutes of the expiry to get off the STT trap but however how can we exit from the futures contract? As it will end on the expiry day itself. Is my understanding in both the points right? You can exit all derivatives positions before expiry if you wish too.

However, it certainly makes sense to exit the ITM options before expiry for reasons stated here — http: But do note, futures position is not affected by STT. So you can continue to hold them to expiry. Today I stimulated arbitrage in nifty and as per excel sheet it is showing Please check this — https: Thanks and regards, Samir.

Dear Nitin sir, is it a good strategy to long future of nifty and sell corresponding call and vice versa as strategy equivalent to stock backed call or will it be naked risky to do so.

Naked options are always risky. If you are not willing to expose yourself to so much risk, then yes, hedging is a good practice. An ITM option will always expire at a price lesser than the intrinsic value. Sir is it possible to create an arbitrage opportunity by entering into Call, Put and Futures at different points of time? For example, the option prices are always high in beginning of contract so short the put option then, and as time passes, buy call option and futures at a lower price?

Would that be possible? I know that it is not possible to predict option movements, but what do you think of this sir? Yes, in fact, there is something called as a box strategy, involving 4 option legs which mimic 2 futures trades. Sort of an arbitrage, do check it out. First of all, thanks for the reply sir. From what I understand, it is possible to create an Arbitrage opportunity and that the box trading system is a limited and risk free profit strategy.

May I ask, what are some others strategies like this one, or which book deals with them? Yes, the risk in box is execution risk. Assuming you execute the trade at the right prices, you can capture the risk-free profit.

Sir that was a fascinating book and thanks for the recommendation. I have two questions 1. Have ever executed the box strategy and what can you say about that?

If we manage to convert it into an automated trading system, it would be like you said, a money machine, or am I missing something?

Sir thank you so much for pointing me toward option volatility and pricing, it was a treasure. I have developed a trading system based on Box strategy. However, I have not done this before and am having problems with backtesting the same. What do you suggest I do now?

So do backtest or at least get an insight into its behavior. In the worst case, take it live, with small quantities and scale it over time. Sir about Box Spreads. Have you ever been able to successfully execute it? Also, can you give me some pointers regarding the execution of Box strategy and other such Execution risk involved arbitrage strategies? Very cumbersome since it involves 4 legs. A lot of execution risk as well. I am a great fan of Karthik Rangappa and Varsity.

Tried to create a google excel sheet which will get automatically update every 1 hour to find these kinds of opportunity. If interested people can refer to https: When will I be able to earn profit as per showing in excel. So when will I earn this? Do I need to keep this position open till expiry to earn Rs.

Is it difference of spread on expiry day while closing position or 20 Rs. Arbitrage involves buying and selling the same asset simultaneously across two different markets, with an intention to make a risk free or relatively low-risk profit. Let us consider a few market expiry scenarios — Scenario 1 — Market expires at below ATM At , the CE would expire worthless, hence we would lose the premium paid i.

However we have paid as premium hence we experience a total loss of 80 PE — the option would expire OTM, hence we get to retain the entire premium of On one hand we make 80 and the other we lose Hence we neither make nor lose any money, making the breakeven point for this strategy. Further, here is the payoff at various expiry levels — And when you plot the Net Payoff, we get the payoff structure which is similar to the long call futures.

But if things change, so will your profitability, let me list few things that could change — No Fish opportunity risk — Assume one day you go to the market to buy fish at Rs. Then you have no opportunity to make Rs. No Buyers liquidity risk — You buy the fish at Rs. You are left holding a bag full of dead fish, literally worthless! What if on a bad day you happen to buy at and sell at ?

You still have to pay 20 for transport, this means instead of the regular 30 Rupees profit you get to make only 10 Rupees, and if this continues, then the arbitrage opportunity would become less attractive and you may not want to do this at all. Transport becomes expensive cost of transaction — This is another crucial factor for the profitability of the arbitrage trade.

Imagine if the cost of transportation increases from Rs. Clearly the arbitrage opportunity starts looking less attractive as the cost of execution goes higher and higher. Cost of transaction is a critical factor that makes or breaks an arbitrage opportunity Competition kicks in who can drop lower?

Now imagine this — So far you are the only one doing this trade i. Both of you buy at Rs. Who between the two of you is likely to sell the fish to the buyer? Clearly given the fish is of the same quality the buyer will buy it from the one selling the fish at a cheaper rate.

Assume you want to acquire the client, and therefore drop the price to Rs. In the whole process the price keeps dropping and the arbitrage opportunity just evaporates. How low can the price drop? Obviously it can drop to Rs. Beyond , it does not makes sense to run the business Eventually in a perfectly competitive world, competition kicks in and arbitrage opportunity just ceases to exist.

In this case, the cost of fish in neighboring town would drop to Rs. Here is an example that will help you understand this well.

On 21 st Jan, Nifty spot was at , and the Nifty Futures was trading at Going by the arbitrage equation stated above, if one were to execute the trade, the positions would be — Long CE Scenario 1 — Expiry at The CE would expire worthless, hence we lose the premium paid i. Scenario 2 — Expiry at The CE would expire worthless, hence we lose the premium paid i. Consider this — Brokerage — if you are trading with a traditional broker, then you will be charged on a percentage basis which will eat away your profits.

So on one hand you make 10 points, but you may end up paying 8 — 10 points as brokerage. However if you were to do this trade with a discount broker like Zerodha, your breakeven on this trade would be around points. If you are long on an ITM option which you will be then upon expiry you will have to pay a hefty STT, which will further eat away your profits.

Please do read this to know more. Other applicable taxes — Besides you also have to account for service tax, stamp duty etc So considering these costs, the efforts to carry an arbitrage trade for 10 points may not make sense.

January 28, at January 29, at 2: February 3, at 3: February 4, at 5: February 10, at 3: March 13, at 9: March 14, at 7: January 29, at 6: January 30, at 6: January 31, at February 1, at 6: January 31, at 1: February 1, at 9: February 2, at 5: