13 Responses to Trade – Buy/Write DUG/DUGKY

  1. Karina says:

    I don’t see how this is supposed to be arbitrage. If the stock plummets you still lose money. The Call premium compensates you exactly for that risk not more, not less. If you do this a million times you will come out at zero. Real Arbitrages involves a riskless profit without initial cost. Can you explain why you think you are exploiting arbitrage opportunities. Thanks. Cheers

  2. Rich says:

    Webster’s definition of Arbitrage:
    1 : the nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies

    What part of buying long and selling short don’t you understand? Why are you interjecting your own definition of arbitrage on this blog?

    Perhaps technically going long in an equity and shorting the derivative options isn’t exactly a “pure” definition of arbitrage, it is close enough for me.

    And there is no such thing as riskless profit anywhere in the universe unless you work for the government that has the power to tax citizens.

  3. Karina says:

    Hi, thanks for the quick answer. Well, this is not my own definition of arbitrage but the one you find in every finance textbook in the world. You can see this on wikipedia for example. You are almost right that “there is no such thing as a riskless profit” (you can always invest at the riskfree rate), I think what you mean is “there is no such thing as a risk less profit without initial cost (that’s the technical, academic definition of arbitrage). This would occur if the Put-Call parity wouldn’t hold for example (see wikipedia). The whole finance theroy is based on the assumption of no arbitrage, so you are right (almost, becaue arbitrage opportunities do occur from time to time, but are arbitrages away in seconds). But even if you are talking about risky arbitrage: I do understand the concept of buying long and selling short the call but I don’t see how this is anything like arbitrage: maybe you could state your definition here a but more precisely. You say “trade in different markets to profit from price discrepancies”. Well, you buy the stock, sell the call, Ok, now where is the price discrepancy and how did you discover it? The price of a Call is a function of the price of the underlying, the stike, the volatility of the underlying, etc.) under the assumption that the stock price follows a geometric Brownien motion, constant vola etc you could use Black Scholes to price the call. Your argument only makes sense if you have a better pricing model for Options that gives different results from the widely used once(s). In this case it boils down to the question: “what assumptions of the widely used model do you dispute and what are your alternative assumptions?” Because only then you could infer a mispricing of the Call RELATIVE to the stock, in all other cases the call is fairly priced and you will not gain more on average than the risk free rate. Cheers

  4. Rich says:

    Blach Scholes, Brownein motion, so many academic theories you throw at me to prove me wrong and yet I continue to rake in the profits…Lol! It must be so frustrating……

    The widely “used models” are PURE GARBAGE and only followed by academics and their brainwashed heathens.

    I do have my own proprietary models that I use and they are for me to use because they are custom tailored around my needs. All the mumbo jumbo you talk about are not tailored to anyone’s needs but normal distribution models and “what ifs” that don’t exist anywhere in the real world.

    There is the age old joke of the economics professor and student walking down the street. Both see a $50 bill on the ground but the Professor walks right over it. The student asks, “Professor, why didn’t you pick up the fifty dollar bill?”

    The professor replies, “My dear student, the market is so efficient that it is not possible for that $50 bill to lay on the floor, my academic models don’t support such a notion so I assumed it was an aberration of reality or a figment of my imagination.”

    Karina are you sure you’re not “Fletch” who I frequently argue about the uselessness of the VIX and other Wall Street garbage? What next, the Greek alphabet of variables and theories?

    And for the record, options and equities are traded on different exchanges and on any given day it is possible to see price discrepancies if you have the right tools.

    I want to ask you one simple question. You can go over to google finance, yahoo and many other places online that will quote stocks and some that will quote options but not a SINGLE ONE will give you the simple calculation of the option premium for an in-the-money call on an equity. It is a simple formula to do division:

    Return on Investment (premium) = call option premium (in-the-money-strike) / Equity Value. I spend months looking for a simple website that would do this and I could never find one so I created my own. If the market is so efficient, you’d think someone would have developed such a tool but you’ll only find this kind of tools in hedge funds and other places where the real money is made. The suckers, err….I mean public investors are the ones that don’t have access to the tools and the efficient market hypothesis. I’m doing my little part to enlighten and liberate the world.

  5. Karina says:

    Hello Rich,

    Thanks again for your reply. I get more and more the impression that you do not have a real academic backround, am I right? I don’t think you really understand the concepts pointed out by me, so I don’t see why I should discuss it with you. It doesnt take the restictive assumptions of Black-Scholes to prove you “arbitrage” strategy wrong, just basic stochastics and knowledge about the industy. The only thing that you can think of is “but returns are not normally distributed” Apparently you think that Black Scholes is used widley among traders that don’t believe in market efficieny. Have you read this at wallstreet journal?
    It’s funny that you talk about academic mumbo-jumbo and THEN point out that hedge funds are the places where money is made. There are a few funds with impressive returns check out this one here:
    you can have a look at their employees profile. Maybe you find time to check out some job offers of large investment banks for quant trading positions as well. All they are looking for are high-end academics (PHD in math, physics, finance from a top tier uni). So think again If Renaissance where 100 Phds countinuously work on automated trading algorithms using 100s of computers (these guys devise concepts you would never even nearly understand and calculate with numbers that are like chinese to you), make actually money, will you too? Here’s the deal, people like you are the reason why they are making money, noise traders like you cause inefficiencies that they exploit. In the industry, people like you are referred to as Excel-noise traders that try to use their simple plus minus divided by whatnot strategies that could be devised by every 7th grader. What you do with your strategies is probably not more than creating profits by taking on huge skew or kurtosis risk. I can do that to: I just write Puts that are deep out of the money and will make nice returns that are by construction uncorrelated from market returns. but one day the extrem event is gonna kick in and I will lose everything.
    The simple strategies you devise there probably seem to work for you but that’s just because you don’t really understand what you are doing (the risk implications of you strategy). You are not smarter than academics working at hegde funds, get over urself dude. And if you are, why don’t you work there and make millions? I don’t know any serious quant that has time to write a blog like this one here. On average you do not make risk adjusted excess returns and that’s all that matters. cheers

  6. Rich says:

    “The simple strategies you devise there probably seem to work for you but that’s just because you don’t really understand what you are doing”

    Oh my God, I’m rolling on the floor laughing my ass off…….

    Whatever Karina, I’m off to run my ETF-Cashinator and make some money…..

  7. Karina says:

    I want to put it simple for you, there are a million people out there that want to make a lot of money, a million people that have about your mathematical skill set (which might be quite good, I dont know) but there are about 1000 people in the world that have exceptional mathematical skills. They can devise and implement any strategy you can implement, but not vice versa. Its not about models you apply its about your quantitative skills. the one who is a better quant wins, that’s the reality. I want to apologize if I was a little of the line with my tone here and wish you all the best and good luck with your trading. cheers

  8. Rich says:


    I want YOU to understand that really high IQ people don’t all necessarily work for Quant funds, NASA, or the NSA. Some just have run of the mill jobs and run a blog ;)

    And while 1000 people can have exceptional mathematical skills, most prefer to solve unsolvable problems rather than work for profit. I promise you that I understand mathematicians much better than you could ever understand them ;)

  9. Karina says:

    Hello again, sorry for the spam. After your last message I was thinking, “Well maybe there’s something to his method so let’s have a look at the rest of the website”. I think (without wanting to offend you) you really don’t know what you are doing and this could cost you a lot of money. You have misconceptions about very basic stuff. First of all the way you calculate the running return in your accounts is flawed. You can’t just add percentage gains and losses up to a total. For example if you have an initial position of 1000 dollars and you lose 50% three times in a row. What is your total loss? It’s 75% and not 150%. Secondly, the way you calculate the ROI is flawed (at least according to your definition as the minimum return you will make when you not get called). If you buy a stock position at t=0 for S and write a Call from what you cash in C, and at expiration the stock is worth less than the strike of the Call (lets denote is K), so when you not get called, your return at expiration (T) = (S(T)+C)/S(0). Your theortical minimum return is C/S(0), the ROI you calculate is only valid if S(T)=K. Now if you are saying you are exploiting mispricings than this must be a mispricing of the call relative to the stock otherwise it is a zero sum game in the long run. So your strategy relies on systematic mispricings (over pricings) of calls relative to the stock but you don’t give reasons why there should be a such a mispricing. The only valid reasons could be inferred from certain assumptions about the nature of the stock price movement. The value of the Call (for the on who buys it) at expiration is max(S-K,0). The only question is how does the stock price move from t=0 to T. What stochastic process suits best to discribe it. Then you can infer a fair price for the call at t=0. You rely on mispicings so you logically MUST have your own assumptions about the probabilistic nature of the stock price movement that is necessarily different from the one that most of the market shares. So what are you assuming here? Cheers

  10. Karina says:

    To do it with your numbers: the ROI you calculate $1.75/$37.28 = 4.69% (I assume you mean: (1.75+S(T))/37.28 = 1.046 corresponds to a gain of 4.69%) implicitly assumes that the stock price at S(T) is still 37.28. If theoretically the stock drops to zero you have (1.75+0)/37.28= 0.046 corresponds to a loss of 95.4%. whenever the stock drops by more than 1.75 (whenever it drops below 35.53 you are making a loss), this is where the questions about your assumptions about the probabilistic nature of the stock price movements arises. What do you know about the stock what others don’t know? Do you have insider information? If you have the same information (publicly available data) like anybody, why do you think you can interpret it better and infer a different density of the stockprice at T? You have to be able to anwser these questions otherwise you are just reading “the clouds in you coffee”.

  11. Karina says:

    To put it differently again, writing a call and buying the underlying is equivalent to selling the potential upside of the underlying against a premium today (which is the price of the call) and not limiting the potential downside of the underlying. This is optimal if you knew that the call would be just at the money at expiration, so you would have cashed in the call price but did not lose on a high stock price (what you could have gained if you held the stock only)and neither do you lose because the stock falls that you hold when you don’t get called. So another thing you probably don’t consider are opportunity costs. Even if the strategy makes money, you could have made more money by holding just the stock WITH A POSITIVE PROBABILITY. That’s why people are willing to pay you the price of the call. It makes no sense to state returns without adjusting them for risk AND comparing them to market returns. A written call and long underlying makes therefore relatively less profit if market returns are high and relatively higher returns when market returns are low (because you have cashed in the call price) That’s why it is a zero sum game, UNLESS you know more than everybody else about the probability distribution of the stock at expiration. So if you know that the stock will be around the strike at expiration you will outperform the market after adjusting for risk. I hope now it’s now clear why I am asking about your assumptions about the probabilistic nature of the stock price. Btw, if you are bothered by my post just say so and I will stop posting here. Cheers.

  12. Rich says:


    If you want to understand me better, I suggest you read the top post on this link:http://www.eupedia.com/forum/showthread.php?p=354660
    I’m going to copy a few highlights:

    The higher the IQ, the higher the sense of individuality and the independence of mind. Exceptionally gifted people care (much) less about what other people think of them, and are less sensitive to praise, and even less to flattery.

    Their disregard for conventions, combined with vivid, creative and independent mind, often make them coin new words (often just for fun, to see the reaction of those who care about conventions), or use rare words (not by pedantry at all, but just because they like them better). In other words, they recreate the conventions for themselves.

    Typical high-IQ people are constantly thinking about something, worried about a problem, thinking about solutions… So they end up having little time and energy left, and little motivation, for ordinary chit-chat.

    Their strong independence of mind and deep intellectualisation of things results in exceptionally gifted people having stronger individual interests than average (“passions” for some topics or activities). Once they get into something, they want to know everything about it (which can make them look like geeks or freaks to ordinary folk).

    At school, exceptionally gifted children are easily bored by lessons, because they understand before everyone else and get irritated when the teacher has to repeat for slower people.

    High-IQ people are very individualistic, but they usually strive for the common good (as well as their own interests). Their passion for things, their sense of logic, and their desire for perpetual improvement, make of them good politicians and philosophers. On the other hand, they usually dislike routine jobs, with predefinied tasks and little space for creativity and a sense of intellectual challenge.

    So far, YOU have not show any of these characteristics and as such I am terminating this conversation. It’s not personal and I take no offense to your comments but it’s getting me nowhere fast and I don’t have time to dilddle and daddle about academia and trivial formulas. If you have your own blog, your own investing system or anything of value other than mundane criticism please continue to contribute but I don’t get any of your points….I’m making money just fine with my system and I won’t trade any other way until I find a better way.

    And the reason I said hedge funds make money isn’t because they have 100 Ph.d’s it is because they have access to capital.

    I’m really busy now and the Professor has important things to do ;)

  13. Karina says:

    Well, sorry to hear that you think this is about IQ. I never claimed to have a high IQ, neither have I claimed you had a low IQ. I dont see how this is relevant for the questions I have pointed out. I have looked at your website first very quickly, after your comments I got the impression that you are a creative person so I had a closer look at the website and found severe mistakes in your calculations and conceptions. Why do you ignore this? I am happy when people challenge my concepts because its an opportunity to get better at what I do, to get rid of mistakes that I might have overlooked, it helps to see things from a different perspective, consider things you I would have forgotten otherwise. It is a very valid remark to say that percentage changes in a position cannot be added together as this produces wrong results. The other things I have pointed out are also valid. The formula is not correct according to your definition (This has nothing to do with academica just like 1+1 is not 3, its just a fact) and you cant just put the error aside by saying “dilddle and daddle about academia and trivial formulas”. Just by pointing out mistakes I am not saying you dont have a point but lets be honest. In non of your posts you have justified any of your concepts, you couldnt even explain why you use this particular strategy in the first place. The only thing you have done (and please read you posts again) was navigating around the valid questions I have asked. Why cant you argue your point? You can assure you that these questions are valid (ask others on Wilmott forum for example) Its not like you have invented the buy long write call strategy (you might have seen this ETF here: symbol: PBP whose return profile btw proves some of my points). I think if someone claims to have a concept that works but refuses to answer critical questions does not really have a point, cuz if they had they could justify it. Happy Valentines Day! Apart from our discussion here: are you single? :-)

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