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Yeah, an arbitrageur would buy SolarCity and short Tesla. So that isn't a risk for them.
by kryptiskt 10y ago
Yeah, an arbitrageur would buy SolarCity and short Tesla. So that isn't a risk for them.
- toomuchtodo 10y agoOr buy calls on SCTY and puts on TSLA. Much less risk (only the options premiums).
- jonknee 10y agoGood luck with that, you'll lose all profits in premium. Check out the Nov 18 SCTY calls, IV over 70 and the premium for the 20 strike is 10% of the current share price. TSLA is not a lot better, IV of 50.
- JumpCrisscross 10y agoDon't do this. You have worse data, less training and slower connections to the exchanges than the competition. You're spitballing in an arena (merger/stat arb) filled with smart people thinking day in and day out about this specific phenomenon. I used to build market-making algorithms for exchange-listed stock options. Many of our counter-parties were stat arb funds; we'd try to pre-empt their moves. We'd then predict how their likely trades would interact with our merger views as well as our predictions around how other stat arb funds would trade, and trade on those meta predictions. I'm sure there were turtles another level down trading based on predictions of how our meta models would interact with other market makers' meta models and the stat arb funds themselves. TL; DR options are complicated, stat arb is complicated, and lots of smart and dedicated people are making it all more complicated every day.
- SEJeff 10y agoTHIS SO MUCH ^ I work for one of said financial firms and you simply can't beat algorithms with directly connected market data feeds to the exchanges unless you also want to pay for them.
- deleted 10y ago[deleted]
- gaadd33 10y agoWhy does exchange speed matter if your internal model shows profit at the current bid/ask prices and volatility? Is it because in the event of a massive change in the underlying you can't exit the positions fast enough to recover some of the premiums?
- SEJeff 10y agoBecause other users with the same or more sophisticated models might have fiber optic direct connections into the exchange, and they will have algorithms which make those decisions before your optical nerves have processed numbers changing.
- JumpCrisscross 10y ago> Why does exchange speed matter if your internal model shows profit at the current bid/ask prices and volatility The implication is that every sophisticated investor who focusses on this domain (i.e. merger arbitrage with options) have probably either (a) seen and passed on or (b) already executed on the pricing you're witnessing. You need an extremely high level of confidence in your models to act. Given you are the less-sophisticated agent, the Dunning-Krueger effect merits consideration. This is not a blanket statement against individual investing. Individual investors have been shown to possess statistical edge, particularly over 20+ trading-day time horizons. But if you're stacking yourself against the experts in a domain marked by legal theory, board-executive politics, other-stakeholder politics, shareholder-board-management politics, et cetera together with thinly-traded non-linear derivatives, you're unlikely to succeed.
- jacquesm 10y agoImage of a goldfish jumping into a sharktank saying 'much less risk'.
- kbody 10y agoYou basically are betting for the same outcome in two different ways, full exposure. I don't see how this is arbitrage.
- milcron 10y agoYou're betting on the merger going through, but keep a net-neutral exposure to whether the stock goes up or down.
- kryptiskt 10y agoIt's merger arbitrage, the exposure is against the merger going through or not. The market is filtered out. LTCM lost a bundle on it when they were hunting opportunities at the end.
- maverick_iceman 10y agoI think that's hedging, not arbitrage.