The following is the OptionBT sighting of
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Position Description  :
Position taken   :
Six months out,
Time only spread on Puts,
Long the 07 Dec 1600 Puts (1000 cnt), Short the 06 Dec 1600 Puts (1000 cnt)
No Margin required,
Close on the day of trade June 14,2006 was 1230.04.
Dec 15,2006 / Settlement = 1428.74
1000 long put options, 1000 short put options
Credit or (Debit)   :
Net = $820,000
Comments   :   "TB Master"
"TB Master" is a master Time Bandit.
Time Bandits are time-only deep-in-the-money put spreads.
This is the only position where the combined good things of
"no margin required" and "position established for a credit"
exists simultaneously. Since the further
out in time option is bought and the nearer month is sold short there
is no margin required.
The special situation here is that the 07Dec1600 Puts cost less
than the 06Dec1600 Put options.
You don't spend any money and someone gives you
$5M for nothing.
Before you run out and try this with a $20k on-line brokerage account,
you might want to recognize that the danger is as real as the payout.
"TBM" isn't called a Master without reason.
The deciding factor in each attempt to make this sensational play work is
the spread that is achieved going in . Over the years many time bandit
want-to-be's have come and gone and few have had the right stuff.
Here "TBM" obtains a remarkable $50.7 point spread at his "Buy In".
In addition it is very important for
"TBM" to exit while the
getting is good. This he does in two stages.
On the 3rd of July 2006 "TBM" decides to "Lighten Up". He does this by dumping
300 of the 1000 count he controls. He recognizes that a multi-million dollar
700 count will be easier to close that a 1000 count. This cost him $1,590,000
of the $5,070,000 that he has in his pocket from the buy-in.
Although the exact transaction is not clearly visible there are only a few days when
"TBM's" EndGame could have occured. For the sake of this examination we will assume that
"TBM" closed his position on the 1st of December 2006. This is a tradition among Time Bandits
to close on the first day of the month of the settlement for the near month options.
The volumes on this date for the two options
supports the 700 count that "TBM" must move. For the sake of the final tally, the Last price
for this day is used. At a minimum we can see that "TBM" bought back the 700 count of short
options and sold his 700 count of long options for a cost of $2,660,000. This left
him with $820,000 in his pocket after all the smoke had cleared.
Before you try this at home, one of the things that must be acknowledged is that
"TBM" does not work alone. There is a partnership here. He has to know in advance that
there is a partner who will buy his long 07Dec1700 puts. This is a lot of money and
the one who buys them must fit them into his particular scheme (a separate transaction set)
which will allow this partner to prosper also. He has to have this money to cover his short
06Dec1600 puts. The amount he needs to cover this short is $14M. This is a good partner
indeed. You have to choose you friends well. If "TBM" were left
to twist in the wind then when the short 06Dec1600 puts came due on the 15th of December
2006, our hero would have been wiped out.
Time Bandits are a rare breed. They seldom succeed. This one is a Master.
There are some things that you must keep in mind that are critical to the Time Bandit.
The spread is the most important thing, but the second most important is that the
SPX must move higher toward the strikes in the spread.
Without this movement the prices will not converge.
This movement must occur before the near month options expire.
If all Time Bandits succeeded then we could conclude that if you see a Time Bandit then
the market is about to take off to the up side. Unfortunately due to the high
failure rate of Time Bandits this is not a solid indicator.
In this case the window of six months from mid July to the first of December 2006 was
the time when "TBM" had to have the SPX move up big.
When "TBM" started this quest the SPX was at 1230. The settlement for
December, 2006 was 1428. This is 200 points to the upside. This is the exact formula
required for the success of a Time Bandit.
Whatever it was that "TBM" was watching
that convinced him that this would happen is a mystery.
Congrats to the Time Bandit Master.
I just wish I knew what set of indicators
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