selling calls/buying puts on stocks w/ unavailable shorts

AceRothstein · May 8, 2005

I wanted to do some research on this and thought this thread would be a start.

Are options are viable means of playing the downside on stocks that are on the "hard to borrow" list, or unavailable to short for whatever reason?

I am looking at this from a short-term intraday perspective. Meaning holding the positon for a matter of hours or less. In a sense, this would amount to actually daytrading options. Is anybody out there doing this?

straddler · May 8, 2005

the options should have the stock loan difficulty already priced in. The puts will trade higher than the calls by the loan rate. For a day trade, it really won't matter since you are looking for a specific move in the underlying.

Rearden Metal · May 8, 2005

Sure, I short synthetic all the time for daytrades. Just make sure the options are heavily traded, so the liquidity is there.

MTE · May 9, 2005

Your main problem is wide bid-ask spreads and low liquidity. Here's a simple formula to see if it's worth trading the option: take the bid/ask spread and divide it by the option's Delta.

This will tell you by approximately how much must the underlying move in order for you to breakeven on the option.

E.g. an option quote is 1.80 bid - 1.90 ask, Delta is .59

So, 0.1/0.59=0.17

In other words, the stock has to rise by $0.17 just for you to breakeven on the option trade.

T+3guy · May 9, 2005

Its very simple --If you buy deep in the money PUTS you will be short the stock 7-10 cents lower than the last price.

Most prop firms however don't give traders access to trading options b/c deep in the money PUTS carry a large Premuim.
In my firm we are given access to trading options so this is how we get short stocks that are falling with no upticks.

areyoukidding? · May 9, 2005

Quote from T+3guy:

Its very simple --If you buy deep in the money PUTS you will be short the stock 7-10 cents lower than the last price.

Most prop firms however don't give traders access to trading options b/c deep in the money PUTS carry a large Premuim.
In my firm we are given access to trading options so this is how we get short stocks that are falling with no upticks.

Whats your firm?

AceRothstein · May 9, 2005

Quote from T+3guy:

Its very simple --If you buy deep in the money PUTS you will be short the stock 7-10 cents lower than the last price.

Most prop firms however don't give traders access to trading options b/c deep in the money PUTS carry a large Premuim.
In my firm we are given access to trading options so this is how we get short stocks that are falling with no upticks.

wouldn't the premium on the puts negate a serious portion of the profit?

Rearden Metal · May 9, 2005

Quote from AceRothstein:

wouldn't the premium on the puts negate a serious portion of the profit?

Time decay isn't much of an issue for <b>daytrades</b>. (Excluding front month during expiration week).

GATrader · May 9, 2005

Firms don't like to offer otions to their daytraders since.....

1. They don't have risk managers to monitor traders.
2. Options are paid for in full and are not Reg T so it eats up firm capital.
3. Their traders might consider trading options on a longer term basis instead of scalping which lessens pnl.....theirs.

AceRothstein · May 9, 2005

From what I hear so far, this looks like it could be a viable method to play hard to borrow stocks (that have a liquid option market). I'm going to start studing option chains when I get a short signal on the underlying positions and see what I observe.