Arbitrage Lessons : for Beginners

[drbubb]

Arbitrage Lessons : for Beginners

An interesting exchange over at Stockhouse - concerning WT vs. Share arbitrage

A / (menoalittle wrote):

Short Position down, because...

truth be told, it's just about time for a face ripping rally...

B / (FreeGold1 wrote):

Hmm.  Do you understand how arbitrage works?
You can lose money on one side of the trade (the shares), so long as you make more money on the other side (the warrants).
You buy in a ratio, like 1000 warrants, for every 500 shares you short

Read more at https://stockhouse.com/companies/bullboard#jtQqTpFUl5FoTzuf.99

C / ( menoalittle wrote):

Of course I do.  Do you understand how math works?

Maybe not. Because I've run some numbers, and your scenario makes absolutely no sense whatsoever.

For example - at the height of the stock run (last part of Feb) let's

1) sell (or short) 1k shares of GCM @ 4.40 (no trade fees - net 4,400)
2) buy 1913 GCM warrants @ 2.30 (no trade fees - cost 4,400)

note that as being a mere 11 cent premium for the warrants.

Now, move forward to more recent pricing spreads between the two, with the premium for the warrants jumping to 56 cents, over 5 times what is was previously, and sell the warrants:

1) sell 1913 GCM warrants @ 1.8 (no trade fees - net 3,443.40)
2) buy 998 shares of GCM @ 3.45 (no trade fees - cost 3,443.10)

So... perhaps you can spell out for me exactly how it is that this "arbitrage" you proposed is (or was) supposed to make any money when prices declined, even though the premium for the warrants increased significantly?
Read more at https://stockhouse.com/companies/bullboard#lBMcO0g2vzix7DIc.99

 

[drbubb]

I will explain later why this is laughably wrong

[drbubb]

DATA & Chart bank

GCM vs-GCM.wtB ... from 6/2017 / Last: wtB: C$2.14 +0.15 / Gcm: C$3.94 +0.23 = r-50.0%

Yesterday, the closes were: $2.14, $3.94, $0.165 / wtB/GCM= xx, SSP/GCM= xx, SSP/Gcm.WtB= xx

DATE=C$: GCM.t Wt.B : Vol.  : Ratio: ITM-$: TimeV: %IV :  %442/ SSP.v : %Gcm
09/06/18: $2.16: 0.710, 00.0k : 32.9%: 0.000: 0.710 : 0.00%, 48.9/ $0.240, 11.1%
09/28/18: $2.25: 0.970, 00.0k : 43.1%: 0.040: 0.930 : 4.12%,  50.9/ $0.240, 10.7%
10/31/18: $2.32: 0.910, 66.8k : 39.2%: 0.110: 0.820 : 12.1%, 52.2/ $0.215, 9.27%
11/30/18: $2.53: 1.280, 22.1k : 50.6%: 0.320: 0.960 : 25.0%, 57.2/ $0.180, 7.11%
12/31/18: $2.82: 1.400, 00.8k : 49.6%: 0.610: 0.790 : 43.5%, 63.8/ $0.245, 8.69%
01/28/19: $3.36: 1.630, 26.7k : 48.5% : 1.150: 0.480 : 70.6%, 76.1/ $0.290, 8.63%
02/19/19: $4.42: $2.42, 69.4k : 56.8% : 2.210: 0.210 : 91.3%, 100./ $0.295, 6.67%: wt.High Close !
02/28/19: $4.40: $2.41, 15.9k : 54.7% : 2.200: 0.210 : 91.3%, 99.6/ $0.265, 6.02%
03/29/19: $3.67: $1.80, 30.5k : 49.0% : 1.440: 0.360 : 80.0%, 83.0/ $0.230, 6.27%
04/30/19: $3.34: $1.70, 12.3k : 50.9% : 1.130: 0.570 : 66.5%, 75.6/ $0.170, 5.09%
05/13/19: $3.31: $1.67, 08.5k : 50.5% : 1.100: 0.570 : 65.8%, 74.9/ $0.160, 4.83%
05/16/19: $3.69: $1.95, 08.1k : 52.8% : 1.480: 0.470 : 75.9%, 83.5/ $0.160, 4.34%
06/06/19: $3.94: $2.14, 94.5k : 54.3% : 1.730: 0.410 : 80.8%, 89.1/ $0.165, 4.19%
========================
Default seems to be: Wt.B trades at 50% of GCM, when GCM is <$3.50