Free Money in Stock: Conversion

award, the option is a contract between the buyer and the seller of the stock. This contract includes agreement on the right of the buyer and the seller is required. The buyer is that he / she has the right to buy shares at a price that was accepted by the seller. The requirement seller that he / she has to sell stock to the buyer at a price agreed by the buyer. Stock option is a contract between the buyer and seller of the shares on the stock to trade in a given period. Option can be used to cover or protect the position of the portfolio, as well as how the insurance of property. Option can be used to your money is invested in the stock market to protect. Besides the protection of resources, using the option, we can implement the arbitrage strategy that can earn profits, regardless of the share price goes up, down or side road. arbitrage strategy is a strategy without risk and may allow you to generate profits without any loss.

The conversion is a kind of arbitrage strategy of trading options. This strategy involves buying stocks, selling and buying call option put option. These three steps are performed simultaneously. Buying and selling of the option exercise price must be the same and the amount of money that is received from the sale of the option should be sufficient to buy the put option. Thus, in this strategy, it seems that you just a share to buy just because the amount of money after selling the call option more than enough to put option and buying in general, it has more extra left over after the sale and purchase of call option put option. The requirement of this strategy is the difference between the bid price and the option to request the option price must be less than the difference between supply current stock price and exercise price of the option. The comparison with the requisite supplies is as follows:

offer price purchase option – option to ask> questions the current stock price – the price of the option strike

There are three ways for us to order for this strategy. We can use the collar strategy, including call strategies by triggering a put option and a strategy that includes a stock combo. All orders must be placed by using a threshold. Following the implementation of this strategy of trading options, we need to do is simply to leave these positions until maturity. You can connect these three positions of one or two days before the date of expiry of the option by buying and selling at or close to the exercise of options.

For example, we sell business CAT 1960, option for $ 4.90 and we can buy 60 put option at USD 3.10 and buy shares of CAT at 61, $ 35. The difference between the call and put option price is 4.90 to 3.10 = 1.80. The difference between the stock and the exercise price of the option is 61.35 to 60 = 1.35. Thus, the difference between the purchase and sale option is more than the difference between the stock and the exercise price of the option. The significant differences of the two is our gain is from 1.80 to 1.35 = 0.45. If we buy a contract, the profit is 0.45 x 100 = 45 USD each. However, the Operations Committee of the strategy is generally $ 90, depending on the service brokerage firm we use. So we have to buy at least three contracts that we make a profit.

So, how does this strategy work? As we said purchase option, we effectively protect the stock we bought. The purpose of the sale of the call option is to generate money to buy the put option. It seems that after the sale and purchase of call option put option, the extra money in the account. But actually we still need a deposit amount to implement the strategy. So, after the implementation of this strategy if the fall in equity prices, we have the ability to protect our stock. If the share price actually fell on the date of expiry, we can sell or exercise the option to retrieve all the loss to buy shares. If the share price has risen to the expiration date, we leave both call and put options expire worthless. However, because we sell call option at 60 strike price, the buyer of the option 60 to us and ask for a stock at $ 60, even if the current market price is higher the price. Because we sell call option at 60 strike price, then we have the obligation to sell stock to the buyer at USD 60. If we do not own shares, we need to buy shares on the market at a higher price and sell to the buyer, option 60. We lose money. But do not worry, because we own a stock, so we have to do is simply sell the stock at $ 60 to U.S. 60 Call option buyer. Even if the current stock price is higher, we lose nothing by this strategy. However, we made a little profit booking. Why this can happen is due to the difference of the stock and the option price. That’s because stock and option prices are influenced by their own supply and demand. This means that the file may have more questions, but his choice may have less demand.

The advantage of this option and stock trading strategy is that it is absolutely safe. Regardless of how changes in stock prices, earnings down. It will not disappear. The second advantage of this strategy is that it can be multiplied by more than purchase contracts. If we accidentally a penny on the edge of the road, we all have, if we take and keep. But the stock market, when we see this difference, we can small amount multiplied by buying more units of stock. However, there was indeed a lot of disadvantages in this strategy. The first disadvantage is that the profit is very low, usually 10-50 percent per device option. The second disadvantage is that only expensive stocks have this opportunity. The third drawback is that the Commission can implement this strategy is high, typically $ 90 for the entire transaction. However, this disadvantage can be overcome using the brokerage firm, unless the commission. The fourth disadvantage is that the enormous capital required to implement that strategy. Because some contracts from the high prices of the stocks must be bought in this strategy.