Risk Free Investing
From OneBuckWiki
Risk Free Investing
Arbitrage
Arbitrage is taking advantage of intermittent price discrepencies in two or more markets. If an index consists of 30 stocks and trading at lower than the total value of its components (30 stocks in their portion), One can Buy index and sell equivalent 30 stocks and entering an arbitrage situation. Sooner or later, the index will revert to its mean and makes profit for the person who enters into such situation.
Profits are small percetage in most cases but success rate is 100 if intrest, commissions and slippage are calculated when valuating the opportunity.
Collars and Other option strategies
Collar is an option strategy where you
- Hold the Stock
- Buy a put to protect the investment [Like Insurance, if the stock goes below certain price, you are covered]
- Sell a call above your total cost [Call buyer gets a right to buy the stock if it exceeds strike price.]
Let us see an example:
- If you Buy 100 shares Mastercard at 152.00 cost of shares is $15,200
- A Put with strike 155 for Jan 2009 costs $2500 ==> Another $2,500
- Sell A Call for Jan'09 strike 170 for $26.00 ===> Credit is $2,600
Net investment is $15,100 for this position. (15200+2500-2600)
What happens in the three possible situations on Option Expiry (3rd Friday of Jan2009)
- If Mastercard stock goes below 155, You can turn and sell your shares for 155 with the put you have. This case your investment is worth 15,500
- If Mastercard goes above 170, Put expires worth less. Call buyer takes your shares for 170 or toal sum of 17,000. Yu made a profit of $1,900 or cool 12.5%
- If Mastercard stays between155 and 170, Both options expires worth less. Your profit at that point will be somewhere between $400.00 and $1,900.00
As time goes between now and Jan 2009, these option and stock prices change. If you realize you have some profit, you can buy your short call and sell all your holdings, realizing risk free profit.
http://finance.yahoo.com/q/op?s=MA&m=2009-01
Commissions are not included in the example.
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