Arbs on Share Futures

[tradewin]

I've spied any number of arbs on Single Share futures, say 30 points between firms on Mar '07 quotes for some shares.

Although this profit is 'locked in', does anyone have any thoughts on how to manage the Stop Loss and Margin requirements of the two companies.

It seems, perhaps understandbly, to makes it very difficult to take this very attractive arb positions.

Any thoughts?

 

[damianoakley]

Hi tradewin,

Arbitrage opportunities come and go very quickly in any market. You would have to devise a very slick and efficient execution method if you were to make successful arbitrage trades.

I know of a trader who does this type of trading, but he is a computer programming wizard who has written his own software to help him hunt down and trade arbitrage opportunities at lightning speed. Even with his software, it is not always possible to profit every time.

Good Luck

Damian

 

[Directional]

say 30 points between firms on Mar '07 quotes for some shares.

Although this profit is 'locked in', does anyone have any thoughts on how to manage the Stop Loss and Margin requirements of the two companies.

Are you talking about true arb or correlated pairs trading? theres a big difference

 

[stevespray]

I've spied any number of arbs on Single Share futures, say 30 points between firms on Mar '07 quotes for some shares.

Although this profit is 'locked in', does anyone have any thoughts on how to manage the Stop Loss and Margin requirements of the two companies.

It seems, perhaps understandbly, to makes it very difficult to take this very attractive arb positions.

Any thoughts?

Why would you need to manage the stop loss? If the profit is locked in then its locked in. Are you sure that you're not missing something re the pricing of the future price vs the underlying stock price? For example there could be an ex div date between now and the futures expiry? If this is so then it will be discounted in the futures price and hence will appear as an anomoly as you suggest. Of course, if you are short the underlying stock, you will have to pay the divi (the reverse of receiving it when you are long). Instant execution on both sides of the arb will also be a factor. Logic dictates that you can protect yourself from most of the dangers by opening the futures position first. The companies will of course take a dislike to you trading this way. No free lunches mind!

Steve.

 

[capitalspreads]

tradewin

arbs on single stocks

often arbs occur on single stocks with SB companies because the forward price will contain several variables. the main variable is the dividend. Most SB companies quote many thousands of markets and may miss the dividend expected before the future settlement or put the wrong expected dividend number in. (i.e there is a dividend in RBS march 2007 expected at around 59p which will decrease the forward price by this amount) Unfortunately for the arber if the SB company realises that it has made a mistake it will adjust the price of all open bets to reflect the correct dividend adjustment. The terms of all SB companies specifically mention this. The client will not lose a penny on the adjustment of the bet (with that SB company) as the bet price will go up or down to the same extent as the current quote will move. BUT it will wipe out the 'arb' and force the arber to close out at a loss.

I also notice that one SB company has, very recently, removed all dividend variables from its forward prices and will now adjust the bets on the day of the dividend payment. I would advise you to ensure that this is not the arb that you are talking about !! As this would be a costly mistake to make.

Simon