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  • Dani

Post Market Arbitrage

Some traders believe that there are no arbitrage opportunities left in the market because the HFT companies exploit them in mili-seconds. That is true for fast trading and big amounts of trades, however sometimes when you hold an option position that is about to expire, you might be surprised to find an arbitrage that you can grab.

Here is a small (330$) but without any risk profit that I picked up today. I mean if you find 330$ that belongs to no one, on the side of the road, wouldn't you pick it up?

INTC closed the day at the price of 50.08 .

I had 2 positions that expired today: 60 CAll 50 & 60 PUT 51.5 .

Because they both were in the money in the closing price (50.08), I didn't need to take any action after the close, since my broker will exercise them automatically if they are 0.01 in the money, thus I was covered. (call = 0.08 & put = 1.42).

Now let's talk about the arbitrage opportunity:

Since I am long the options, I can choose not to exercise them, even if they expired in the money:

So if someone sells INTC in the post market session at a price that is below my Call 50 strike (which was 0.08 in the money), I can buy the stock at a lower price, and then tell my broker that I don't want to exercise it (don't buy it for 50 according to the call's terms).

Be sure that you know the cutoff time of your broker. (for example 16:30 ETS).

So knowing that I don't have to exercise the options, allowed me to buy INTC at a lower price, and tell my broker to Lapse some of the options.

(later, I sold them back again at higher price, trying to take another round, so didn't need to lapse after all).

As you can see there were trades under the strike in the post market trading:

So, if you have options that expired close to the strike, don't forget to check the post market session to see if someone throws some money at you.

It's totally free, and without any risk.

A final important thought:

If you are an option seller, that expired in the money near a strike, be aware that there is a possibility that the option buyer will decide not to exercise it, and then someone is going to be surprised on Monday to see that he is long/short a position that he didn't want to have. (randomly assigned/not assigned).

That is why when the expiration is pinned to a strike, you may want to close your short options for 0.01-0.02$ just to avoid that scenario.

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