And a lower price for the call you buy. Normally the combo vs stock (a conversion or reversal) is simply a function of cost of carry and dividends. In a hard to borrow stock you can buy the combo at a discount to the normal rate. Consider someone who wants to short the stock. They can accomplish the same buy buying the put and selling the call of the same strike. Now they don't have to be bought in or worry about paying the high short rate, but it will cost them extra to put on this position. If you sell him this position, you will get this extra benefit. If you simply buy the stock, you are giving the extra money to the clearing firm instead who gets to make money loaning your stock out.
Simulating long by buying call and selling put?
- Thread starter spurityw
- Start date
And a lower price for the call you buy. Normally the combo vs stock (a conversion or reversal) is simply a function of cost of carry and dividends. In a hard to borrow stock you can buy the combo at a discount to the normal rate. Consider someone who wants to short the stock. They can accomplish the same buy buying the put and selling the call of the same strike. Now they don't have to be bought in or worry about paying the high short rate, but it will cost them extra to put on this position. If you sell him this position, you will get this extra benefit. If you simply buy the stock, you are giving the extra money to the clearing firm instead who gets to make money loaning your stock out.
If your end goal is to waste your time, yes.
Just a word of warning, this is only true for European options.
Dividends increase put premiums. Borrow rates increase call premiums.
Not true, the synthetic short will pay more for the position then he would for a non hard to borrow stock. The synthetic long will be able to take advantage of this and buy his synthetic long at a lower price. Hard to borrow stocks have higher put and lower call prices. You will often see calls trading at parity when they would normally trade with premium.
it is an excellent strategy in life, if you have to make an unclear decision. then you move on.
When looking at conversions and reversals, the carry cost is factored in. I assumed that carry cost is the same as borrow cost and evidently that is incorrect. Would you mind presenting a pair of hypothetical examples that demonstrates this? The first one with no borrow cost and the second with a large one? TIA.
(This brings out the nerd in me....)
A strategy carries the implication of (high level) broad views given to general officers.
A tactic (with roots in touch) refers to immediate actions.
'Selling a put and buying a call' tells you nothing about how to manage the trade after that -- no conditions on entry, no time horizon, no position management -- it is a single action. It is a tactic.
Assemble your tactics on entry, alternatives, calendar awareness, and exit, and you'll have a strategy.
(Now, where's that "Nerd!!!" emoji??)
No, both borrow rates and dividends lower the forward and thus increase put premiums. Increase in financing rate raises the forward and thus increases the call premium.