Model + Software
First, using sophisticated software and its built-in JumpDiffusion model, Apple’s ($AAPL) stock price was 170.16 @ 2:57 P.M. CST. The market price for the Jun17 $170 Call was $9.35, but the model predicted that by close, the price should be $8.99. So the option is sold and the trader waits for the price to converge.
Pictured below: 250 Jun17 Calls sold for a premium of $233,750.
After waiting for market close to arrive, the model proves to be accurate. The price converges to the projected price and the order is sold for a cost of $224,750.
In all, selling the call option 2 minutes before close captured a premium of $233k, then buying it back 2 minutes later created a cost of $224k. This spread resulted in a $9,000 profit (before fees+tax) in less than 2 minutes. Now, imagine employing this a hundred times a day, over hundreds of different stocks.
In the age of trading access for all, trades like this are more abundant than ever. This form of trading is known as relative value trading. The jump-diffusion model used is what you’d find in most proprietary option funds that employ these strategies on a daily basis.
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