Index Investing News
Tuesday, May 13, 2025
No Result
View All Result
  • Login
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
No Result
View All Result
Index Investing News
No Result
View All Result

The Biggest Non-Scam on Wall Street

by Index Investing News
October 12, 2022
in Markets
Reading Time: 4 mins read
A A
0
Home Markets
Share on FacebookShare on Twitter


I’m all about keeping a healthy dose of skepticism. The financial world is notorious for attracting fraud and scams that trap gullible investors.

But I also know that certain things are verifiably good for everyone, despite their reputation.

Take high-frequency trading (HFT). HFT firms rapidly buy and sell shares to fill our orders. They make a few cents, or even fractions of a penny, on each trade. By executing millions of orders, they make big money.

This has sparked some controversy and harsh criticism because it can seem as though these firms are front-running our orders. They buy solely to sell to us. They mark up the prices and profit on the difference.

This all sounds bad. But before you run off imagining HFT firms as organized mobsters running the show, I can assure you they’re not.

HFT actually works to our benefit, and in return, market makers capture low-risk gains for their service. So, it’s a win-win for both sides. And I have concrete math to prove it.

Put-Call Parity Keeps Prices in Line

Not only do HFT firms enable us to trade options on any stock by adding liquidity to the market, they’ve also lowered the cost of trading under what it would be with other systems.

That’s because a critical equation keeps prices in check — the put-call parity equation.

HFT firms use the put-call parity equation to limit their risks when buying and selling to execute our orders. It states that the value of a put and the stock is equal to a call and some cash.

Here’s the formula:

P + S = C + PV(A)

P = price of put with strike price A.
S = price of stock.
C = price of call with strike price A.
PV(A) = net present value of the option’s strike price.

Now that we know the theory behind the formula, let’s look at an example.

On Monday, Apple Inc. (AAPL) was trading at about $140.65. The $141 call expiring on October 28 was trading at $5.45. The $141 put expiring on October 28 was trading at $6.10.

Let’s plug these numbers into the formula:

P + S = C + PV(A)

For our purposes, let’s rewrite it to:

P + S = C + (A / (1 + R) ^ T)

Where R is the interest rate a broker charges on a margin loan and T is the length of the loan in years.

For this example, the variables are:

P = $6.10
S = $140.65
C = $5.45
A = $141
R = 3.83% or 0.0383 in the formula.
T = 0.049 since the option expires in 18 days.

For this example, I’m using the interest rate charged by Interactive Brokers.

Plugging in our values, we get:

$6.10 + $140.65 = $5.45 + ($141 / (1 + 0.038) ^ 0.05)  (1)

Let’s reduce:

$146.75 = $5.45 + ($141 / 1.002)  (2)

$146.75 = $5.45 + $140.72   (3)

$146.75 = $146.17     (4)

As you can see in line 4, the two values on both sides of the equation end up being close for me, off by just 0.4%.

That can be explained by the fact that I don’t have true real-time data. HFT firms collocate servers at the exchange. They use gold-tipped cables to minimize delays. They have true real-time data.

Their interest rate is also lower than the one I used. And they don’t ignore the dividend to simplify the calculation.

If you stuck with me through the math, you now know exactly how to confirm prices are fairly marked.

I’ve done this calculation hundreds of times. It’s always the same. The prices match the formula within 1% almost every time. For an illiquid stock, the difference might be 2%.

This means we get fair prices when we trade. And if we don’t, an HFT firm will jump in and take the mispriced option. With this formula, they can earn a quick, risk-free profit.

If the AAPL call was trading at $5.10, for example, the formula wouldn’t balance. So, an HFT firm could buy the cheap side of the equation and short the expensive. They immediately lock in a risk-free gain.

That threat makes mispricing rare. So, I don’t ever expect to spot one. Arbitrage traders would jump into the market and push the mispriced option back in line with the put-call parity equation.

I benefit from all this knowing I can trade any option, on any stock.

Andrew Keene also applies this idea in Trade Kings.

Andrew is a former market maker — in fact, he was the No. 1 market maker for Apple options on the trading floor at the CBOE — and he’s an expert at trading on volume and open interest.

So many years as a market maker taught Andrew to pay attention to order flow. Eventually, he realized he could design scanners that tap into this order flow, and signal trade opportunities. And he started sharing those signals with his followers in a live, one-of-its-kind Trade Room.

This Trade Room is free to join until tomorrow’s close. And just this week, Andrew’s scanners have produced over 18 signals… with gains reaching as high as 198%.

To secure your spot in tomorrow’s Trade Room session at 9:30 a.m., just click here.

Regards,


Amber Hestla
Senior Analyst, True Options Masters





Source link

Tags: BiggestNonScamStreetwall
ShareTweetShareShare
Previous Post

Omicron COVID boosters (almost) cleared for kids as young as 5 years old

Next Post

The Joy Luck Club sequel in active development with Amy Tan and Ron Bass writing the script

Related Posts

Fintechs that made income from excessive rates of interest now face key take a look at

Fintechs that made income from excessive rates of interest now face key take a look at

by Index Investing News
May 13, 2025
0

The app icons for Revolut and Monzo displayed on a smartphone.Betty Laura Zapata | Bloomberg through Getty PicturesMonetary know-how corporations...

Tariff cuts can get China-made items to the U.S. in time for Christmas

Tariff cuts can get China-made items to the U.S. in time for Christmas

by Index Investing News
May 13, 2025
0

A employee finishes pink Santa Claus hats for export at a manufacturing unit on April 28, 2025, close to Yiwu,...

Coinbase becoming a member of S&P 500, changing Uncover Monetary

Coinbase becoming a member of S&P 500, changing Uncover Monetary

by Index Investing News
May 12, 2025
0

Brian Armstrong, CEO of Coinbase, talking on CNBC's Squawk Field exterior the World Financial Discussion board in Davos, Switzerland on...

Earnings Preview: Can Deere & Firm (DE) return to progress in Q2 2025?

Earnings Preview: Can Deere & Firm (DE) return to progress in Q2 2025?

by Index Investing News
May 13, 2025
0

The Deere and Firm (NYSE: DE) has confronted a downturn in latest instances, usually reporting decrease quarterly income and earnings,...

May You Program the Subsequent Killer App?

May You Program the Subsequent Killer App?

by Index Investing News
May 12, 2025
0

If you happen to needed to start out an internet enterprise on the flip of the century, you'll have needed...

Next Post
The Joy Luck Club sequel in active development with Amy Tan and Ron Bass writing the script

The Joy Luck Club sequel in active development with Amy Tan and Ron Bass writing the script

Episode #449: Jim Rogers – The Adventure Capitalist’s View of Global Markets – Meb Faber Research

Episode #449: Jim Rogers – The Adventure Capitalist’s View of Global Markets - Meb Faber Research

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

RECOMMENDED

Tongo Provides Tax Administration Associate April

Tongo Provides Tax Administration Associate April

January 30, 2025
There are four million households in North Carolina

There are four million households in North Carolina

October 24, 2023
2 Cuban migrants fly into Florida on hang glider

2 Cuban migrants fly into Florida on hang glider

March 26, 2023
Jobs report fuels speculation of impending interest rate hike

Jobs report fuels speculation of impending interest rate hike

April 7, 2023
Classified documents are found at Mike Pence’s home just months after he denied having any

Classified documents are found at Mike Pence’s home just months after he denied having any

January 24, 2023
Liquidity help is precedence; charge lower a detailed name

Liquidity help is precedence; charge lower a detailed name

February 5, 2025
David Tepper snaps up SVB Financial bonds, preferred stock – report (NASDAQ:SIVB)

David Tepper snaps up SVB Financial bonds, preferred stock – report (NASDAQ:SIVB)

March 18, 2023
India brings the world’s focus back on terrorism

India brings the world’s focus back on terrorism

November 24, 2022
Index Investing News

Get the latest news and follow the coverage of Investing, World News, Stocks, Market Analysis, Business & Financial News, and more from the top trusted sources.

  • 1717575246.7
  • Browse the latest news about investing and more
  • Contact us
  • Cookie Privacy Policy
  • Disclaimer
  • DMCA
  • Privacy Policy
  • Terms and Conditions
  • xtw18387b488

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

No Result
View All Result
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In