selling calls/buying puts on stocks w/ unavailable shorts

[GATrader]

If stocks r hard to borrow, their puts are going to be very expensive. witness GM discussion 1-2 dys ago whrein the puts are 35 cents more than the calls. Always remember that the option MM have to be on the other sie ofthe trade and as such need compensation for trading against u.

 

[T+3guy]

Quote from AceRothstein:

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

No it wouldn't. The premuim largely remains unchanged even with time decay because it is very deep in the money (the strike price that is). So after establishing a short position by buying a put, you simple buy the stock to cover your short. Now you are hedged. If the stock price goes down you make on the put but your gain is offset by your loss by the stock that you own. And if the price goes up you losse on the put make proportionately on the stock. We excersize the PUT/stock position whenever we want to, and then at that point we regain the premuim that we paid for the PUT.
Furthermore, as the stock price climbs closer and closer to the strike price of the PUT you begin to having a growing call value that you can sell for a profit. Your upside is not limited at all. If the stock goes to the moon overnight, chances are it will pass your strike price and then your in long stock position.