a) When you short sell a stock, can you take part of the proceeds from the sale and reinvest them in something else? I know part of it must stay as collateral, but all of it?
Is this why when interest rates rise, the price of puts goes down? Compared to a real short you can’t reinvest the money? (I understand why calls go up, but not why puts go down)
b) If the a government bans short selling after you sold short a particular stock (ie Eurozone banks now or America during financial collapse) do you have to settle your trade or can you just not add onto your position?
A) Yes you can reinvest in something else. A put means you’re waiting around to SELL something, so if rates go up you don’t mind waiting around meanwhile collecting that fat interest payment, therefore the put price/premium should be HIGHER because the put is more valuable to you. Correct me if I’m wrong. B) I don’t know sorry
CFA volume 6: pg 117… “When interest rates are higher, call option prices are higher and put option prices are lower” Also I know you can reinvest if you bought a put, but you can when you short no option?
a) It depends on your relationship with your broker. In retail accounts, you probably can’t use any of it. In ahedge fund prime brokerage account the short position just adds to the amount you are required to keep in margin. b) I don’t know what happens next time they ban short-selling, but the ban in 2008 did not affect existing short positions.
Short sale ban has till now not affected existing short positions and as Joey says next time who knows. Sure way to get the market to skyrocket. 14bill shares approx short interest on the SPX. Now that would be a monster rally. Wouldn’t put it beyond the powers that be.