Added another 1,000 C "free money" position

The price divergence for C is still there today. Checked with Broker website and they still have 600,000 shares available for shorting.

Price divergence is at $0.76, still looks attractive. Gone ahead and added another 1,000 position so total position is now 3,000. Target free money is around $2,163 ( i.e. 3,000 x $0.721 ).

AVERAGE PRICE
Short Sell 3,000 C at $3.855
Sell 30x Jun-PUT-Strike-$5 at $2.403
Buy 30x Jun-CALL-Strike-$5 at $0.537
Net cash collected is $5.721 ( i.e. 3.855 + 2.403 - 0.537 ) per share.

Free money through Citi shares Reverse Conversion

Price divergence on C still here today. The potential gain per share has dropped to $0.73 as compared to yesterday's $0.90.

Today the Broker has 1.3M C shares available for shorts. Gone ahead to create a small position on this.







AVERAGE PRICE
Short Sell 2,000 C at $3.75
Sell 20x Jun-PUT-Strike-$5 at $2.46
Buy 20x Jun-CALL-Strike-$5 at $0.48
Net cash collected is $5.73 ( i.e. 3.75 + 2.46 - 0.48 ) per share.

If no major events occur, by expiry Jun we will buy back C share at $5 to cover back the Shorts and gain a net $0.73 profit per share. It's like converting the Share (sell at $5.73) into Option (to buy back share at $5.00), a reversion conversion.

For those people who own C shares, it is easier as they need not Short Sell but just to sell their C shares. And by expiry June, they can get back their C share at $5 and keep the $0.73 per share profit.

A) BY EXPIRY JUNE - OK

1) if C > $5, we exercise our CALL option to buy C at $5 to cover the Short Sell. The PUT option expires worthless.

2) if C < $5, we are oblighted by the sold PUT & assigned the C shares at $5. The CALL option expires worthless.

3) if C = $5, assign or exercise price is same as market price. Likely both options expire worthless and we buy C from open market to cover the Short Sell.

B) OPEN POSITIONS MANAGEMENT FROM NOW TILL EXPIRY JUNE

1. If C > $5, no action needed. The CALL option provided us the right to buy C at $5. The PUT is out of money and will not be assigned. OK.

2. If C < $5 and the PUT get assigned early, we pay $5 for C shares. The CALL will still have some time value e.g. $0.10 or $0.20. So net gain will be more than original target of $0.73. OK.

3. If C is at $5, no action needed. OK.

4. If broker requests us to return C shares early ( not sure whether they have this right or not ).

a) If C is > $5, we exercise our option at $5 and return C share to broker. We Buy back the PUT position which by now will be very cheap. So will be in the money but slightly less than $0.73. OK.

b) If C is < $5 but > $3.75, we need to buy from market at less than $5 (additional saving) and return to broker to cover Shorts. The CALL will have increase in value and the PUT reduce in value. We will Sell the CALL options and Buy back the PUT options. So end result is we will make more than original target of $0.73. OK.

c) If C is < $3.75, we need to buy from market at less than $3.75 (additional saving) and return to broker to cover Shorts. The PUT when bought are in-the-money PUT, so as the share price dropped, likely the PUT will increase in the same amount or slightly lower (assume volatility about the same). The cheaper amount we pay for buying back the shares from open market, can offset the cost increase to Buy back the PUT. The CALL price (bought at $0.48) will reduce. So net profit may be slightly less than the targeted $0.73. OK.

d) If C is = $5, we buy from open market to cover the Shorts. Then Sell the CALL and Buy back the PUT. The price of the CALL should be about equal to the price of PUT. OK.

Free money from Citi share+option combo setup appeared again today !

Was out for 2 weeks. No major trades over that period.

Today most banks share price dropped while Citi share price increased.

Citi is the largest shorted share in the open market, about 1.2 billion shares shorted. It is about 4 times the 2nd largest shorted share SPY (about 300 million shares shorted). Citi price has been on the increase over the past 2 weeks, so likely most of the pure shorties (no option protections) are rushing to buy in to cover their short positions. So C will likely to continue to rise this week until a few days after Citi announce their earnings this Friday.


The free money from Citi scenario appeared again today! Tried to setup a 5,000 positions on that combo to check out margin requirement and plan to increase it to much larger quantity after that.

Steps are :
1. Short Sell C at market price $4.41 (collect money)
2. Sell June PUT option strike price $5 for $2.30 (collect money)
3. Buy June CALL option strike price $5 for $0.81 (pay money)
Total net money collect is $5.90 ($4.41 + $2.30 - $0.81).
The option setup enable us to buy C at $5.00 by expiry June.
So net free money per unit is $0.90 (i.e. for each share shorted + option positions created).

Surprised to find that the queue for Short Sell at Market Price did not get executed. It normally happen instantly for Market Price orders.

Went in to check my Broker website for Shares Available to short and found that there is non available to loan to short for C (on 20-Mar-09 there were 2 million shares availalbe !).

Sigh..... gone ahead and cancel the Short Sell order for C. Checked out a few other bank shares for similar opportunity but none have such a big price divergence situation.