Traders: minimal risk investment?

Bump!

How much capital are you working with? In terms of inputs

Not factoring in capital, just looking at whether the fundamental construct would work in practice. It seems too good to be true.

The only flaw I can see, is that you'll be unable to get an option premium below the dividend yield.

Not factoring in capital, just looking at whether the fundamental construct would work in practice. It seems too good to be true.

The only flaw I can see, is that you'll be unable to get an option premium below the dividend yield.

Not factoring in capital, just looking at whether the fundamental construct would work in practice. It seems too good to be true.

The only flaw I can see, is that you'll be unable to get an option premium below the dividend yield.

I also feel that if you have the right security plan you may not need to hedge your bets.

I still feel that the ultimate way to reduce risk is through a mixed portfolio!

Personally, I am not interested in these trades as I would need to have a large input to reap any decent reward worth my time. I prefer Forex.

Okay, so I was at the office today just trying to come up with various ways to beat the market. It's probably already being done if it's viable.

So let's take securities like publicly traded equities/fixed income/CDs that pay a dividend yield or coupon. Let's say that these are blue chip, highly liquidated stocks. If you were to buy a stock/bond/CD on dividend ex-date and take out an option till dividend/coupon pay date to hedge against the risk of market fluctuation... Surely, as long as the premium payment of the option is lower than the return on the yield/coupon payment, you've essentially made a profit with potentially 0 risk exposure, after the initial premium payment.

What are the limitations to this strategy, if any?

If you go back and look at basic option pricing you'll find that even in no model pricing this doesn't work by no arbitrage. So any model that introduces extra assumptions will also not allow this strategy.


Posted from TSR Mobile

Yeah fair enough.. you can't go wrong with diversity.



How long do you hold positions for on average?

On average, 1.4 hours.

lol

Forex markets move quickly Chang.

To make this is a bit simpler. You could use a forward instead on an option.

You would buy the security in the spot market and simultaneously sell it forward after you've received the coupon. With the removal of the optionality this is essentially a reverse repo (more precisely a buy/sell back). In the case of a bond the forward would settle on the dirty price therefore taking into account the dropping of the coupon.

Where there is potential to earn return is via the funding. Implicit in the calculation of the forward selling price is a rate of funding, if you can fund more cheaply than the person pricing the forward (they will short the security and cover it on reverse repo) then you can potentially make a profit. Your market risk exposure would be if your funding cost spiked as the rate of return you would earn on this structure would be fixed. i.e. If you funded the bond on overnight repo while entering into a 1 week forward and overnight rates increased during the week you could lose money.

Volatility in FX has been crushed over the years. They don't move that quickly.