2002issue C051-3
Selecting the single-stock future as the short-sale switch
A physically settled single-stock future was specified as a 100-share unit that became the named shares at expiration. Treated as a call struck at zero, it could replace a delayed cash short so a conversion or reverse conversion could be locked when options sat away from modeled fair value.
- A single-stock future was specified as a 100-share unit that, unlike a cash-settled index future, was assumed to become the named shares at expiration.
- Treating the future as a call struck at zero allowed a short to start on the futures bid without waiting for a cash-market uptick.
- Conversion and reverse conversion were defined as near-zero-delta three-ways that could use cash stock or the single-stock future.
- A brief withdrawal of futures quotes, while the cash stock and listed options still traded, was the setting where prices could diverge enough to lock the package.
The contract unit and physical settlement
The archive specified a single-stock future as a 100-share unit. Unlike cash-settled index futures, physical settlement was assumed, so the contract converted into the underlying shares at expiration.
The futures price was described as depending on the cash stock price, interest rates, any dividends, and time remaining to expiration. Proposed initial margin of 20 percent was presented as five times the buying power of unlevered stock, versus twice the buying power when holding the shares themselves.
Zero-strike treatment and the uptick constraint
The future was treated as a call struck at zero. Under that zero-strike treatment, a short could be started by hitting the futures bid without waiting for an uptick in the cash stock.
The uptick constraint is the cash-market rule that can delay a short sale until a plus tick prints.
Conversion and reverse conversion
A conversion was defined as long stock, long matching puts, and short matching calls. Those options formed a synthetic position that shorted the stock, offset the shares, and left a near-zero-delta three-way.
A reverse conversion was defined as long call, short put, and short stock or short single-stock future, again targeting a near-zero-delta three-way.
A same-session construction
In a same-session construction, a 20-strike call priced at 5 against a 25 stock, paired with a short future at 25, left a residual of 5 if the stock fell to 15 and stayed below 20.
Quote withdrawal and locking the three-way
Brief quote withdrawal in an electronic book, while the cash stock and listed options continued to trade, was identified as a setting where stock, option, and futures prices could diverge enough to be acted on. That setting is a fair-value gap: a temporary mismatch among stock, put, call, and futures quotes relative to rate, dividend, and time inputs.
Substituting a sale of the future for a delayed short in the cash stock was described as a way to lock a conversion or reverse conversion when options were away from modeled fair value.
All readings on this track · 5 readings
- 2002Selecting the single-stock future as the short-sale switch
- 2004Constructing the cash open from futures fair value
- 2007Option arbitrage as a six-layout construction problem
- 2008Opening auction, market making, and arbitrage as a capital business
- 2012Forex arbitrage is usually correlation, not riskless profit