Now, we'll get to the dynamics that make these sorts of no-brainer trades possible in a bit (hint: it's all about how difficult it is to short the stock). But first, let's take a deeper dive into the options market to find out how the real options pros trade.
Because for the serious options trading desks, buying the stock at a 20 to 35 percent discount isn't good enough. For them, only arbitrage profits will do.
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So how do GoPro options offer an opportunity for profits without any risk of loss? Admittedly it is not intuitive, and requires a more detailed understanding of the occasionally arcane concepts of options clearing. But I'm asking for some patience here, because this is important.
The Options Clearing Corp. (or OCC, as it is more commonly known) is a clearing organization which acts as the guarantor for all U.S.-listed options obligations. Centralized clearing is important in the secondary markets. It permits instruments to be traded without some kind of bilateral agreement (which is common in over-the-counter markets).
If two parties reach a bilateral contractual agreement, generally only the parties to the agreement can unwind said agreement. Trading would be difficult if we could only negotiate with the individual who transacted with us initially!
Essentially, when an options contract trades, one party holds the option to buy or sell the underlying instrument, while the other party is obligated by the options contract to sell or buy the underlying instrument if so instructed. However, the OCC actually stands in the middle.
If we exercise our option, the OCC is the guarantor of performance. If one is assigned, the OCC instructs the obligated party to perform the duty that was previously agreed to. In this capacity, the OCC is actually the counterparty to every listed options trade.
Why is this important? Because the OCC wants to be a fair and equitable organization. The OCC doesn't play favorites, and it doesn't single folks out. So if someone who owns options elects to exercise those options early, the OCC doesn't hunt down the party they traded with initially to assign them. Instead they assign pro rata. That means that all the member firms should be assigned proportionally.
When we transact in the marketplace, we rarely know who we're trading against. It is important that it doesn't matter. We would be more reluctant to transact if it did. Imagine adding a guess regarding who might be trading against you into your calculus.