Say I'm shorting 100 shares of SPY ETF, and I intend to keep them for 30 days, SPY is now trading at $337 / share. If I were to buy them, I'd have to pay $33,700 (will ask a question on that later).
But instead I'm shorting them, meaning I borrow them from the broker.
In this case the broker would charge an interest rate which seems to be around 1.5% per year, with 360 days. So the interest paid on borrowing the ETF would be (30 / 360) * (1.5 / 100) * 33700 = $42.125.
I'm interested in computing how much money (investment) do I need for such a position. If buying the ETF I'd need to pay the full amount, so $33,700. But I'm shorting it, so I only need to provide the required margin, which seems to be in the 50%. So only $16,850 plus the interest on the borrow.
But then, I also purchase an ATM call option to protect me in case the stock goes up. The option costs about $8.7, so at x100 contract size, I'm paying $870 for it.
But then again! There's no need for the 50% margin since my position is fully protected. As far as I can see it, my required investment would only be cost of option + cost of borrow, so $870 + $42.125 so roughly $913!
When I make or lose money, I need to compute them against the amount I'm required to put in. In this case, short SPY + buy call, is it correct to consider my investment is $913? Or do I need to consider the full price for the ETF, as if I were buying it, so $33,700. I mean like the difference is huge, a 37x leverage.
And then the question on when I buy the ETF. If I buy 100 shares "naked", I need to come up with $33,700. But if I buy a put contract for the same price of $870, then do I REALLY need to come up with the full amount of $33,700 to buy the ETF? Is it correct to consider I'm using borrowed cash just like I use borrowed stock in the short case? So instead of $33,700, I only need to come up with the interest of $42.125 for 30 days? So in both buy and sell of ETF, if I use an option to protect my risk, the cost of investment goes down by a factor of 37x?
But instead I'm shorting them, meaning I borrow them from the broker.
In this case the broker would charge an interest rate which seems to be around 1.5% per year, with 360 days. So the interest paid on borrowing the ETF would be (30 / 360) * (1.5 / 100) * 33700 = $42.125.
I'm interested in computing how much money (investment) do I need for such a position. If buying the ETF I'd need to pay the full amount, so $33,700. But I'm shorting it, so I only need to provide the required margin, which seems to be in the 50%. So only $16,850 plus the interest on the borrow.
But then, I also purchase an ATM call option to protect me in case the stock goes up. The option costs about $8.7, so at x100 contract size, I'm paying $870 for it.
But then again! There's no need for the 50% margin since my position is fully protected. As far as I can see it, my required investment would only be cost of option + cost of borrow, so $870 + $42.125 so roughly $913!
When I make or lose money, I need to compute them against the amount I'm required to put in. In this case, short SPY + buy call, is it correct to consider my investment is $913? Or do I need to consider the full price for the ETF, as if I were buying it, so $33,700. I mean like the difference is huge, a 37x leverage.
And then the question on when I buy the ETF. If I buy 100 shares "naked", I need to come up with $33,700. But if I buy a put contract for the same price of $870, then do I REALLY need to come up with the full amount of $33,700 to buy the ETF? Is it correct to consider I'm using borrowed cash just like I use borrowed stock in the short case? So instead of $33,700, I only need to come up with the interest of $42.125 for 30 days? So in both buy and sell of ETF, if I use an option to protect my risk, the cost of investment goes down by a factor of 37x?
