Rare arbitrage profit from call vs put prices: explain why not being taken?

If you take both dividends and holding interest into account, the put indeed should equal the call (put/call parity).

As said, this parity not holding true happens a lot when the stock is not shortable: people short the synthetic which drives up the price of the put (&premium) and drives down the call (&premium) and nobody can arb it because of the locates.

If you CAN short it at IB, be VERY aware of the interest you're paying ! might be up to 100% !!
 
Quote from Option Trader:

I thank everyone, but the point about the carry cost is very incorrect.

Reason 1: It's relevant to the February expiration as well (and even more so last week).

Reason 2: there is no need to short the stock, rather, for whoever wants to buy the stock, can simply buy the calls and sell the puts, and it achieves the same affect at $.10 cheaper.
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Are you still talking about this? I'm the one that told you in the option forum that put/call parity doesn't hold with hard to borrow stocks. And you need to get over your belief that these stocks are actually available for borrowing at pennies.

As far as "reason #2"... even if that disparity exists, there's no way to take advantage of it. Whoever is buying the stock at market prices is either unable (many investors aren't able to get into the option position), or uninterested in the equivalent option position.

And no one else is able to step in and arb out the difference, because, again, these stocks are *hard to borrow*. You can't arb out the difference without being able to short. The fact that this mispricing exists is precisely proof that you're wrong in believing that institutional investors can borrow this stock (for less than the cost of the mispricing). If they could, this mispricing wouldn't exist, because it's free money to them as well.

The *REASON* why the puts are trading at a premium at all, is because someone out there has a bearish view of the stock, but are *unable to borrow the stock in order to short*. So, they instead buy the puts.
 
Quote from heech:

Are you still talking about this? I'm the one that told you in the option forum that put/call parity doesn't hold with hard to borrow stocks. And you need to get over your belief that these stocks are actually available for borrowing at pennies.

As far as "reason #2"... even if that disparity exists, there's no way to take advantage of it. Whoever is buying the stock at market prices is either unable (many investors aren't able to get into the option position), or uninterested in the equivalent option position.

And no one else is able to step in and arb out the difference, because, again, these stocks are *hard to borrow*. You can't arb out the difference without being able to short. The fact that this mispricing exists is precisely proof that you're wrong in believing that institutional investors can borrow this stock (for less than the cost of the mispricing). If they could, this mispricing wouldn't exist, because it's free money to them as well.

The *REASON* why the puts are trading at a premium at all, is because someone out there has a bearish view of the stock, but are *unable to borrow the stock in order to short*. So, they instead buy the puts.
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I've got an alternative explanation: they have already taken a big profit this year, and the stock may double or triple in a few days, and they want to hold on to the stock for a long term gain and tax benefit, hence to buy the puts instead of selling the stock before the year is over.
 
Quote from Option Trader:

I've got an alternative explanation: they have already taken a big profit this year, and the stock may double or triple in a few days, and they want to hold on to the stock for a long term gain and tax benefit, hence to buy the puts instead of selling the stock before the year is over.
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And then there would be an arb possibility and anyone would take it and the parity would be there again. So your answer is wrong. See one (or two) posts above yours for the correct answer.
 
Quote from Option Trader:

I've got an alternative explanation: they have already taken a big profit this year, and the stock may double or triple in a few days, and they want to hold on to the stock for a long term gain and tax benefit, hence to buy the puts instead of selling the stock before the year is over.
More...
This alternative explanation only makes sense if *everyone* on wall street (and in the City) were planning to hold this hard-to-borrow stock for 12 months for the tax savings.

In the real world, where there are 8000 hedge funds and probably 50,000 different institutional investors looking for free money, there are *some* investors out there who aren't holding this stock long... and therefore, free mispricings like this do not exist.

This conversation is really going nowhere. I wish you all the luck identifying a broker who lets you short the stock and arb the profits out of this mispricing. I'm all for market efficiency, and if you could pull it off, you would have achieved it.

EDIT: Actually.. I just noticed that the subject of your post was, you're asking for an explanation for why the arbitrage profit is not being taken. And you've now heard the correct answer to that question in about 10 different ways. Not sure what else you're looking for.
 
Quote from heech:

This alternative explanation only makes sense if *everyone* on wall street (and in the City) were planning to hold this hard-to-borrow stock for 12 months for the tax savings.

In the real world, where there are 8000 hedge funds and probably 50,000 different institutional investors looking for free money, there are *some* investors out there who aren't holding this stock long... and therefore, free mispricings like this do not exist.

This conversation is really going nowhere. I wish you all the luck identifying a broker who lets you short the stock and arb the profits out of this mispricing. I'm all for market efficiency, and if you could pull it off, you would have achieved it.

EDIT: Actually.. I just noticed that the subject of your post was, you're asking for an explanation for why the arbitrage profit is not being taken. And you've now heard the correct answer to that question in about 10 different ways. Not sure what else you're looking for.
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Free money ;) People read some books on option pricing and think they can make free money arbitraging :D They don't realize that the hedgefunds have systems that exec ANY arb opp within MICRO SECONDS even before their broker has sent the quote out to those newbies.
 
What I really want to know is the following:

If I do have a broker who allow a limited number of shares to be shorted (which are not htb & no fee to borrow the stock), buy calls & sells puts (i.e. taking on a "reversal" position), what's the likelihood of a forced buy-in due to day to day changes in availability of the shares by the broker?
 
Quote from heech:

I just noticed that the subject of your post was, you're asking for an explanation for why the arbitrage profit is not being taken. And you've now heard the correct answer to that question in about 10 different ways. Not sure what else you're looking for.
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I'm a little slow. I learn by repetition. By the 8th explanation, it even sank into my head

:)
 
Quote from Option Trader:

If I do have a broker who allow a limited number of shares to be shorted (which are not htb & no fee to borrow the stock), buy calls & sells puts (i.e. taking on a "reversal" position), what's the likelihood of a forced buy-in due to day to day changes in availability of the shares by the broker?
More...
Forced buy in occurs when lender of shares wants to sell them and none are available to borrow. How you gonna predict that?
 
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