Quick question: Why would someone sell short a hard to borrow security that costs lets say 15-20% to borrow? If you were truly bearish on the security wouldn’t it be easier (and cheaper) to take a short position with derivatives? I guess the stock loan fee is priced into the derivative combo (not sure if this is the case?), but I still don’t see the inherent benefit to actually selling the stock short.
I’m sure that if the futures contract hadn’t moved to reflect the borrow cost, then there would be a wall of money buying the stock to lend out, and going short the future, in order to clip the borrow fee.
Seems like a risky trade. I’ve never gotten too deep into the mechanics of borrowing, but you can’t just buy a stock and lend it out at your own discretion, can you? You’d need someone in your broker’s loan network to want to borrow it. Even if you can, there’s always the risk it gets returned to you. And you’re assuming there’s a single stock future available. I’ve rarely seen borrows that high, although I heard CORS was like 25%. You’ve got to remember that shorting is generally a short term game, so even paying 10% to borrow the stock for 6 months isn’t that bad if you’re expecting a 30%+ move in the stock.
chrismaths Wrote: ------------------------------------------------------- > I’m sure that if the futures contract hadn’t moved > to reflect the borrow cost, then there would be a > wall of money buying the stock to lend out, and > going short the future, in order to clip the > borrow fee. Has it ever happened that there is a futures contract on a stock with a 15-20% borrow fee? I’d be betting not. TJR - If the stock is hard to borrow, there just aren’t going to be puts available on the stock for any reasonable price either for exactly the reason you point out. If the market rate for borrowing the stock is 15-20%, then you expect that kind of premium on the put as well. NakedPuts - If there is a stock out there with a 15-20% borrow fee, it depends what “you” means. If “you” are a hedge fund you can absolutely buy the stock to lend out. If you think the stock is still going up, this is a way of making serious coin because you get the borrow as well as your “expected” appreciation. As you say, this is almost always a risky move. The risk on this is not usually that the stock gets returned to you, it’s that it gets crushed. If someone returns the stock to you, you just lend it out to someone else. If the borrow rate is 15-20% it means there are plenty of people in line who want to borrow it. The risk on this is to the short-seller when you say you want your stock back and the short-seller has to find someone else to borrow it from. If he can’t, he has to buy it or you get to “buy him in” which means you buy it at the market price and he pays for it.
Is the reason I never have to pay to short stock(if available) because I’m such a small fry or is the reason because it’s happening behind the scenes and they don’t tell me (i’m paying but I don’t know)?
You are paying and you don’t know it. When you short the stock, they require you to keep some or all of the proceeds in an account where they give you some miniscule interest rate. They are free to invest that money in money markets or whatever. You almost certainly can’t short hard-to-borrow stocks.
So assuming the borrow demand is that strong, I can just call my prime and say “lend it”? I was unawares.
If you’re a small fry like me they automatically lend everything in your portfolio as part of your margin agreement. It’s all a lot of voodoo behind the scenes magic that you probably shouldn’t try to understand.
NakedPuts Wrote: ------------------------------------------------------- > So assuming the borrow demand is that strong, I > can just call my prime and say “lend it”? I was > unawares. Pretty much. Edit: IF the demand is that strong, they will probably find you if you have enough of it.
My Firm doesn’t allow me to short sell or buy options. We can do covered calls, and today I wrote a May 180 call against my AAPL position and paid for my bali vacation this summer.
I don’t think you’ve paid for your Bali vacation until the option expires.
He’ll double his vacation if it gets exercised.
Joey, I recall you once said CC’s reduce volatility, but it’s fake or something like that. Could you elaborate please?
I don’t remember what I said…
JoeyDVivre Wrote: ------------------------------------------------------- > chrismaths Wrote: > -------------------------------------------------- > ----- > > I’m sure that if the futures contract hadn’t > moved > > to reflect the borrow cost, then there would be > a > > wall of money buying the stock to lend out, and > > going short the future, in order to clip the > > borrow fee. > > Has it ever happened that there is a futures > contract on a stock with a 15-20% borrow fee? I’d > be betting not. > > TJR - If the stock is hard to borrow, there just > aren’t going to be puts available on the stock for > any reasonable price either for exactly the reason > you point out. If the market rate for borrowing > the stock is 15-20%, then you expect that kind of > premium on the put as well. > > NakedPuts - If there is a stock out there with a > 15-20% borrow fee, it depends what “you” means. > If “you” are a hedge fund you can absolutely buy > the stock to lend out. If you think the stock is > still going up, this is a way of making serious > coin because you get the borrow as well as your > “expected” appreciation. As you say, this is > almost always a risky move. > > The risk on this is not usually that the stock > gets returned to you, it’s that it gets crushed. > If someone returns the stock to you, you just lend > it out to someone else. If the borrow rate is > 15-20% it means there are plenty of people in line > who want to borrow it. The risk on this is to the > short-seller when you say you want your stock back > and the short-seller has to find someone else to > borrow it from. If he can’t, he has to buy it or > you get to “buy him in” which means you buy it at > the market price and he pays for it. HF’s do not lend out stocks. That’s the PB’s biz. HF sign agreements that allow their PB’s to “lend” out their stock. That’s part of the IB huge businesses (securities lending) and they are very careful not to disclose how much they make, but it’s big $. That does not stop one HF-A from contacting HF-B and creating a equity swap, however, there’s counterparty risk that they probably would not be too comfortable with.
I collected enough premium to pay for my airline ticket and more by writing the call. I don’t care whether or not it gets exercised. I got in at $70 - it’s a long term hold now so I don’t mind letting it go and putting the cash elsewhere or just keeping it there for the long haul. If the option does not get exercised next month, I’ll write another call on it.
JoeyDVivre Wrote: ------------------------------------------------------- > Has it ever happened that there is a futures > contract on a stock with a 15-20% borrow fee? I’d > be betting not. I’ll defer to your greater knowledge on that - I’m restricted from shorting so it’s not something I have any experience in. I was just trying to illustrate the misconception in the OP - if there was free money to be made, then someone would take it.
pimp Wrote: ------------------------------------------------------- > I collected enough premium to pay for my airline > ticket and more by writing the call. I don’t care > whether or not it gets exercised. I got in at $70 > - it’s a long term hold now so I don’t mind > letting it go and putting the cash elsewhere or > just keeping it there for the long haul. If the > option does not get exercised next month, I’ll > write another call on it. Sigh. Bottom line is you have a directional bet with a volatility component now. If it goes to $250 you don’t have a long term hold anymore.
You’re just jealous he got himself a free ride to bali and you’re sitting here nitpicking his geniousosity.
MFE Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > chrismaths Wrote: > > > -------------------------------------------------- > > > ----- > > > I’m sure that if the futures contract hadn’t > > moved > > > to reflect the borrow cost, then there would > be > > a > > > wall of money buying the stock to lend out, > and > > > going short the future, in order to clip the > > > borrow fee. > > > > Has it ever happened that there is a futures > > contract on a stock with a 15-20% borrow fee? > I’d > > be betting not. > > > > TJR - If the stock is hard to borrow, there > just > > aren’t going to be puts available on the stock > for > > any reasonable price either for exactly the > reason > > you point out. If the market rate for > borrowing > > the stock is 15-20%, then you expect that kind > of > > premium on the put as well. > > > > NakedPuts - If there is a stock out there with > a > > 15-20% borrow fee, it depends what “you” means. > > > If “you” are a hedge fund you can absolutely > buy > > the stock to lend out. If you think the stock > is > > still going up, this is a way of making serious > > coin because you get the borrow as well as your > > “expected” appreciation. As you say, this is > > almost always a risky move. > > > > The risk on this is not usually that the stock > > gets returned to you, it’s that it gets crushed. > > > If someone returns the stock to you, you just > lend > > it out to someone else. If the borrow rate is > > 15-20% it means there are plenty of people in > line > > who want to borrow it. The risk on this is to > the > > short-seller when you say you want your stock > back > > and the short-seller has to find someone else > to > > borrow it from. If he can’t, he has to buy it > or > > you get to “buy him in” which means you buy it > at > > the market price and he pays for it. > > > > > HF’s do not lend out stocks. That’s the PB’s biz. > HF sign agreements that allow their PB’s to > “lend” out their stock. That’s part of the IB > huge businesses (securities lending) and they are > very careful not to disclose how much they make, > but it’s big $. > > That does not stop one HF-A from contacting HF-B > and creating a equity swap, however, there’s > counterparty risk that they probably would not be > too comfortable with. Say what? Hedge funds do everything under the sun including lend their stocks for money.