Shld 25d R/r

[nitro]

Quote from dagnyt:


Sell the long stock and replace it with the long call and short put. There is NO short stock.
...

That position has skew risk.

 

[TheoHornsby]

Quote from dagnyt:

You don't need interest. This pays much more.

If you own long stock, you can buy the calls and sell the puts and sell that stock. The reverse conversion is priced to lock in a profit in many of these - difficult to borrow -stocks. Because you don't have to short the stock to make the sale, it is free money for you (with pin risk).

I'm confused. If the rate is high on a hard to borrow stock, the calls are going to be higher priced than normal. Why would you want to replace long stock with a long call and a short put? Any reversion toward normal pricing would hurt you.

It would seem to me that the carry cost would go toward the seller of the call who buys the put (synthetic short).

 

[Don87109]

Quote from TheoHornsby:

I'm confused. If the rate is high on a hard to borrow stock, the calls are going to be higher priced than normal. Why would you want to replace long stock with a long call and a short put? Any reversion toward normal pricing would hurt you.

It would seem to me that the carry cost would go toward the seller of the call who buys the put (synthetic short).

It's been a while, but as I recall put-call parity was apparently out of whack. The puts were much more expensive than the calls. So reversion to the mean would benefit the short put holder.

I think puts were expensive because MM's need to hedge long puts with short stock and that was very expensive. I guess the MM's reflected that expense into the put pricing.

Anyhow that's my recollection, hopefully it's accurate.

Don

 

[Don87109]

Quote from TheoHornsby:

I'm confused. If the rate is high on a hard to borrow stock, the calls are going to be higher priced than normal. Why would you want to replace long stock with a long call and a short put? Any reversion toward normal pricing would hurt you.

It would seem to me that the carry cost would go toward the seller of the call who buys the put (synthetic short).

It's been a while, but as I recall put-call parity was apparently out of whack. The puts were much more expensive than the calls. So reversion to the mean would benefit the short put holder.

I think puts were expensive because MM's need to hedge long puts with short stock and that was very expensive. I guess the MM's reflected that expense into the put pricing.

Anyhow that's my recollection, hopefully it's accurate.

Don

 

[nitro]

Quote from TheoHornsby:

I'm confused. If the rate is high on a hard to borrow stock, the calls are going to be higher priced than normal. Why would you want to replace long stock with a long call and a short put? Any reversion toward normal pricing would hurt you.

It would seem to me that the carry cost would go toward the seller of the call who buys the put (synthetic short).

You are confused because there is a high negative interest rate in hard to borrow, which means to short the stock you have to pay, not get the short rate as you normally do on a stock that is not hard to borrow.

 

[TheoHornsby]

Quote from Don87109:

It's been a while, but as I recall put-call parity was apparently out of whack. The puts were much more expensive than the calls. So reversion to the mean would benefit the short put holder.

I think puts were expensive because MM's need to hedge long puts with short stock and that was very expensive. I guess the MM's reflected that expense into the put pricing.

Anyhow that's my recollection, hopefully it's accurate.

Thanks Don. That makes sense. I wasn't factoring in the negative interest rate for borrowing shares. I was using a positiove rate but obviously, I had it backwards.

 

[Gectitguace]

I am sorry, that has interfered... At me a similar situation. It is possible to discuss.