Arbitrage opportunity for IBM stock?

[Kirkrrr]

If you're interested in IBM, this seems like a way to boost your ROI by 3% risk free, unless I'm missing something (just getting into this seriously, so there's def a chance of that) by buying the Jul 21 $90 Call and simultaneously selling the July $100 Call. All things being equal, this is +$300/contract.

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Discuss.

Kirk

[DesertCat]

Let me take a stab at this, let me know if I calculate this wrong as my options experience is pretty basic.

If IBM drops below $90, you keep your $5.90 on the $100 call sold, but you are out $13 on the $90 call, correct? Don't you need IBM to finish above $97 to make this a profitable trade? Essentially it seems like you are taking a small profit capped at $3 most of the time, but occasionally taking a loss that can be as high as $7.

Assume average gain is $2.50 & average loss is $4. You would need to win about 65% of the time to make this profitable and even at 65% your average profit is twenty cents. Let's assume you win about 80% of the time, so your average profit is about $1.20. You still have to wait until July 21 to close out. How much capital does a collar like this lock up? If it's zero, $1.20 is a great return. If it's $100 it's a terrible return.

[gonebroke2]

DesertCat has it right. You can't make a guaranteed profit using this method. Just picture the stock tanking to 50 bucks. You make 6 bucks selling the 100 call and lose 13 buying the 90 call.

[Kirkrrr]

Don't have time to respond right now, but I don't think that's completely right. I'll be back later. Anyone else?

Kirk

[Thremp]

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Don't have time to respond right now, but I don't think that's completely right. I'll be back later. Anyone else?

Kirk

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I think he's right.

[Scorpion Man]

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Don't have time to respond right now, but I don't think that's completely right. I'll be back later. Anyone else?

Kirk

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If you spend 10 more seconds looking for exploitable inefficiencies like this in IBM options for the rest of your life that will be 10 seconds too long.

[mal_noles]

This isnt an arbitrage opportunity, you arent locking in any kind of garunteed profit. You are just long a call spread, if the stock tanks you lose.

[KDuff]

Back to the drawing board. Even if you short 100 IBM, you haven't locked in a risk-free profit. Also, you'd be selling at the ask ($6.10) not the bid ($5.90).

[Evan]

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Also, you'd be selling at the ask ($6.10) not the bid ($5.90).

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You buy at the ask and sell at the bid.