Shorting by writing deep-in-the-money calls

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fgopc1

Lyft options are currently under heavy put-call parity violation, with Oct '18 ATM puts being nearly double the cost of calls.

My understanding at the high level is that this is caused by hard to borrow fees on shorting. Meaning you can't trivially arbitrage this by going short lyft, short ATM put, long ATM call. (+$8 if you could!)

But it seems like you could still "short" Lyft by writing deep-in-the-money calls. i.e. I can write a $35 strike for ~$39 at mid ($37.40 at bid), giving a delta of -1 for quite a drop.

So questions:
1. Are there serious risks in doing this (other than usual shorting risks)? It feels too easy to short this way, so I think I'm missing something.
2. What actually happens if my call is assigned when the stock is hard to borrow?
3. This would allow borderline arbitrage - so I think I'm missing something:

* write (short) $35 call -> receive ~$38.50
* short $75 put -> receive ~$15
* long $75 call -> pay ~$8.

Net proceeds are $45.50 while being short $40 fundamentally of Lyft (+$5.50 profit)

This is profitable at expiry unless Lyft ends below $30. (a 60% drop!)

(Perhaps it isn't possible to actually write these deep-in-the-money calls.. I'm reluctant to try though as I suspect I'm missing something here; my gut suspects some sort of assignment risk blowing this whole thing up?)
 
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There is an additional risk of a Reg SHO violation. So you broker may not allow it knowing the call will be exercised without being able to find a borrow.
 
Ah makes sense. Looking at the threads looks like either:
  • Broker won't allow the trade
  • (more likely) The market makers will not sell the options at a price at or above intrinsic value. Meaning, you either can't buy them or you get insta-assigned if you do.
 
JSOP said:
But it is quite strange why Lyft is hard to borrow when it's just IPO'ed.
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A lot of IPO buys have non-hypothecation clauses in place with their providers so the price does not get dumped early on.

fgopc1 said:
  • (more likely) The market makers will not sell the options at a price at or above intrinsic value. Meaning, you either can't buy them or you get insta-assigned if you do.
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Do you mean sell? If you are the buyer of the option, nobody can assign anything but you.

Market is likely to be very wide, so there will be a lot of things priced into it. The option price will include the cost of borrow and some cost of the risk asymmetry (i.e. if an MM is likely to lose borrow, he'd rather be long convexity and especially be able to early-X). In short, i'd be surprised if there is any arbitrage there.
 
sle said:
Do you mean sell? If you are the buyer of the option, nobody can assign anything but you.
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Whoops, I meant buy not sell. That is the market makers won't buy a deep in the money call option with a positive extrinsic value. If you sell one with a negative extrinsic, they'll just immediately exercise it.
 
ETJ said:
There is an additional risk of a Reg SHO violation. So you broker may not allow it knowing the call will be exercised without being able to find a borrow.
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Huh....... it's just automatically bought back if necessary, so no risk of a violation........
 
JSOP said:
But it is quite strange why Lyft is hard to borrow when it's just IPO'ed.
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Lots of (also very big) IPO's have that....... Just look at the borrow rates after a few days of trading........
 
fgopc1 said:
Whoops, I meant buy not sell. That is the market makers won't buy a deep in the money call option with a positive extrinsic value. If you sell one with a negative extrinsic, they'll just immediately exercise it.
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Yes, so you have to write a bit further out. Maybe strike 45 on the jan20 will not be exercised soon. And if it does, it's not the end of the world.........

If it was easy (with options) there would be no high borrow rate at all........ (i.e. no free lunch)
 
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