Dreary Wrote: ------------------------------------------------------- > christmaths, a better approach is to give a > convincing argument, or rebut what has been > argued. Fine. Have you ever done what you described? Because I have, and you do pay. You pay either implicitly, by receiving a very low interest rate on the restricted cash you hold, or explicitly, by having to actually pay to borrow the stock. The person lending you the stock isn’t doing so out of the kindness of their heart. My guess would be if you have done this, you’ve never actually been able to get a borrow on a really hard to borrow stock, or perhaps you’ve never paid attention to your short rebate rates.
pimp Wrote: ------------------------------------------------------- > Huh? I’m long AAPL at $70. I wrote a covered > call for May $180. AAPL trading at $155. If it > gets to $180, I don’t see how I lose - I’ve still > made $110 per share plus a hefty premium on > writing the calls. AAPL isn’t getting to $180 by > May 17th - it’s run up 26% over the last month. I am going to skip the other argument and address this one since no one else has done so. Your cost basis in AAPL is irrelevant. It’s nice that you have owned it from $70 to $155 but that doesn’t mean anything for this analysis. The important facts are that you own AAPL stock and are making a separate decision to sell a call option. Your reward is simple: the option premium that will pay for your trip to Bali. You are exposed to two separate risks. The first is that AAPL could decline more than your option premium, in which case you will be underwater on the trade assuming you continue to hold the stock. You can easily mitigate this risk by setting a stop-loss. The second risk is the one you seem to be missing. If AAPL blows through $180 plus the premium you received, you are missing out on that upside. Regardless of how you want to look at it from a P&L perspective and no matter what you think the chances are of this actually happening, you lose out in this scenario. Imagine the two trades as separate trades. You own AAPL at $70 and on May 17th it will be worth $X. You also are short call options, which have unlimited loss potential. The fact that you are hedged does not change the fact that you have taken on a new, unlimited risk in this second trade. I realize that this trade will probably end well for you. That has everything to do with holding AAPL from $70 to $155 and very little to do with selling calls with a May expiration.
Nakedputs, again you are going over the same weak logic, ranting about getting paid low interest and hard to borrow stock, etc. That is not the issue. The issue is this: Do you get charged when you short stocks as an individual investor? The resounding answer, lest newbies get derailed by ill-informed posts, is no, you don’t. Do yourself a favor and talk to any of the big brokers to see if they charge you anything. Just because JDV thinks that way, you shouldn’t accept it as fact. JDV is well informed but he can make mistakes like everyone else. He is wrong on this one, big time.
Dreary, doesn’t it worry you when several “well informed” posters disagree with your statements? If nothing else, you owe them the respect of taking a step back and consider exactly what they’re trying to say, rather than reposting right away. You’re being shown a mistake in your thinking, a fundamental one, and you resist it because you’ve “been doing this for a long time.” The fact that none of the other financial professionals on this board are coming to your rescue should be setting off serious alarm bells.
Being forced to accept a below-market rate on cash is the same thing as being charged. This should be fairly obvious. Where do you think the difference between market rates and the rate you are receiving goes?
I think Big Nodge puts it best.
Except you’re not getting a below market rate on your cash because it’s not your cash. If I short MBI I get $11.77 cash deposited into my account. Who cares that I don’t get a good interest rate on that $11.71? In a few months, MBIA will be worthless and I’ll make a $11.71 taxfree profit.
Somehow, some people think they are borrowing funds from their broker, which is not correct. Those who have done this know what I am talking about. Those who are hearing about this only from reading CFA material, are not getting the right picture. It’s very misleading to see what has been written about this in this thread, where someone above claims a cost of 20 or 30% for shorting…that’s bizzar. Trust me for what it’s worth, when you short any stock, assuming your broker has the required shares, you get cash deposited into your account… real cash, dollar on top of dollar goes into your account. You earned that cash by taking the risk of shorting…no one is fooling you, no magic is involved. That’s the end of this thread for me, lets get back to something more useful.
virginCFAhooker Wrote: ------------------------------------------------------- > Except you’re not getting a below market rate on > your cash because it’s not your cash. > > If I short MBI I get $11.77 cash deposited into my > account. Who cares that I don’t get a good > interest rate on that $11.71? In a few months, > MBIA will be worthless and I’ll make a $11.71 > taxfree profit. If a stock is hard to borrow, you will actually have to pay to borrow it. Your $11.71 will also be considered a short term capital gain, even if it was open for more than one year.
MBI is going bankrupt. I will never have to cover and thus never have to pay taxes.
Unless whoever owns your shares wants to sell them and take their tax loss. I guess I’m not as familiar with bankruptcy law though, so you may be correct.
virginCFAhooker Wrote: ------------------------------------------------------- > Except you’re not getting a below market rate on > your cash because it’s not your cash. > > If I short MBI I get $11.77 cash deposited into my > account. Who cares that I don’t get a good > interest rate on that $11.71? In a few months, > MBIA will be worthless and I’ll make a $11.71 > taxfree profit. Why would you think this is tax-free? Taxes are about the same on long and short sales. It simply is your money and just because your broker would like you to believe it’s not doesn’t make it so.
virginCFAhooker Wrote: ------------------------------------------------------- > MBI is going bankrupt. I will never have to cover > and thus never have to pay taxes. Oh that’s interesting…I don’t know how that works… hmmm…
Also Dreary might be missing a tax deduction here. Talk to your financial advisor if you are shorting lots of stock and getting no interest on short sale proceeds.
If you short a stock to zero you pay no taxes. I still am short my Braniff shares. If they ever come back then I’ll have to get a real job.
virginCFAhooker Wrote: ------------------------------------------------------- > If you short a stock to zero you pay no taxes. > > I still am short my Braniff shares. If they ever > come back then I’ll have to get a real job. I can’t believe I had never thought of that… It looks like that’s so. Geez.
This is really playing with my head. For taxable investors, there seem to be some pretty good tax arb games where you take on minimal risk and get free tax deductions if the company goes bankrupt. This could be a really valuable thing to set up in the coming recession.
Not sure Joey, but I think 99.99% of the time you will pay taxes since stock price will never go to zero. Someone is always willing to pay $0.000000000001 per share to claim some of the assets.
Like Virgin said - he’s still short Braniff which was gone in (I dunno) 1986.
Dreary, eventually the shares die cuz it costs time & money to keep them listed. It’s true that they still trade for a penny or 2 after the judge declares them worthless but i believe this is just so the brokers can screw over their clients one last time with a fat trade commission.