Using options, is it possible to yield more than the risk free rate without taking any risk?

Question

If I buy 100 shares of stock and then sell a call and buy a put with the same strike price I should earn the risk free rate. Is this always the case though? Is it possible to find stocks whose calls are overpriced relative to it's puts allowing you to yield more than the risk free rate?

Answer 1

This article discusses this type of arbitrage and why it is rare for the average investor to make money this way. Professionals usually snap up these opportunities when they occur. They can do it with lower commissions/costs than you can.

Answer 2

You will earn nothing on this position. You have done nothing except create costs with no possible return.

Do not listen to J. Russell. He is a child that has read a book and knows a few terms, but has no experience and no money and has probably never made a trade. Worse he doesn't even realize what a danger his ignorance is when offerred as advice. Someone might actually believe this little fool and act on it.

I just saw another of his "answers." The question was, "What will a reverse stock split likely do to the share price?" J. Russell's answer -- "Long term 90% of the time the company will go bankrupt."

Russell is not only laughable but incredible. Does he actually think he is "helping" someone by giving them wrong information.

Go back to the kiddie section J. Russell. You are making us all look bad, you are publicly displaying your ignorance, and you're wasting everyone's time.

Get a face. If you had any credibility at all, you would put up your email address.

Answer 3

It depends how volitale the stock is trading.
You don't want to buy puts and calls at the same price.

Find a stock that is trading in a wide price range.

Ex: SIRI

The price range for this company is $9.43 to $3.60 in the past two years.

Right now you would want to buy calls.
If you noticed the price is most volitale during the fourth quarter every year since 2003.
This is a pattern because of expected earning and subscription growth due to Christmas sales.
Sirius company generates hype during these months to increase sells and that hype also benifits the price of the stock.

I suggest not waiting for the fourth quarter results. Sell your long/put postion before the results, incase the report does not meet expectations.

You would want to buy puts if results did not meet expectations, or you can wait till the hype dies down which is often in Feburary if you look at the chart. A trend has developed that Sirius 1st and second quarter results do not often meet expectation. This is when the stock hits a 52 week low. This ofcourse is the best time to cover your short position or sell your puts.


You can be a successful option trader. Just need to pick a volitale stock and no the trend.

Answer 4

I don't think your statement is true.

What you receive on the call may be less than what you pay for the put. Then there are commissions for three separate trades, or six, in and out. I don't think you will "earn" anything by zeroing out your position and incurring triple costs. I think all you've done is Shorted the Box. The markets are so connected now, there are plenty of arbitragers out there to keep prices in line, and is probably the closest thing to a risk-free type of trading there is. If you try to mess with the Big Boys, I think you will lose.

You cannot do away with risk, but there are many ways to manage it. If you put your money under your mattress, its value can still be eaten away by inflation, fluctuation in currency evaluation, or it might be eaten by rats, or burned up in a fire, or stolen.

Similarly, in the markets, there are a miriad of possible risks. The key to it all, technically, is finding low-risk trades, with a 2:1 return ratio or better. Either you find undervalued investments, or you identify areas of price support or resistance where risk is almost non-existent, for example, where price almost touches a proven trendline or is otherwise an area where price is sucseptible to reversal.

You are on the right track though. You, unlike most people, realize the true purpose of options is for hedging. And you probably know that 85% of all options expire worthless. Has it ever occurred to you that they just might have been "designed" to do that? That's a pretty good edge: 85%. I like those odds. Hmm, what to do with that?

Oh, and one word of advice; okay two. Don't try the options game without option analysis software Buying options is a fools game (the odds are turned against you), but spreads are a possibility. Again, you're playing with the big boys.

Why mess with all of the time erosion and random premium fluctuation and nasty formulas, when you can earn just as much and have almost as much leverage in the futures?

Happy trading and good luck.