Paper Trading Journal: Sept 17, 2013 Statistical Arbitrage Market Strike Time Max Bid Min Ask

SPX Sep21 1600 P 09:30:15:800 $0.15 $0.25 SPX Sep21 1605 P 09:30:06:650 SPX Sep21 1610 P 09:30:05:375 Trade Sell to Open Buy to Open SPX Sep21 1605 P SPX Sep21 1610 P Net Spread/contract Risk Net Delta/contract Vega/contract Theta/contract Credit Debit xContracts $0.35 5 $(0.25) 5 $10 $0 0 +1 +1

$0.10

$0.65

$0.10

$0.30

Analysis: In this trade, 1605 weekly puts were reporting a much higher IV due to an abnormally large spread. Mispricings like these happen often, especially during the first 30 minutes of open. There are several ways to take advantage of this. I could have: (1) Sold to Open 1605 P @ .35: a. Naked selling puts requires much more margin and exposes me to negative vega. (2) Sold 1605 P @ .35, Bought 1610 P @ .30: a. Instant execution for 1610 P @ .30, but trade fees and commissions would have eaten into any scalping profit (3) Sell to Open 1605 P @ .35, Buy to Open 1600 P @ .25 a. Larger spread means larger profit. This would have constructed a bull put spread with credit of $10 per contract. b. 1600 P would have been executed instantly at Ask price Because of the disparity between 1605 and 1610 Puts, it seems best to create a bear put spread for credit, a spread usually constructed for debit. This creates a nearly riskless trade (risk is the time between selling 1605 and buying the 1610 if done individually). Though unlikely, a market crash (whether based on fundamentals or wonky algorithms ie flash crash) would have given this spread a maximum profit of 5.00 per contract. Disclaimer: based on time & sales of SPX options among these strikes, real market sales were made on SPX Sep 21 1605 P @ .35 x 5 at a time of 9:30:06 and SPX Sep 21 1610 P @ .15 x 15 at time of 9:37:24, showing that the trade could have been replicated in realtime rather than virtually. Michael Julian