Synthetic long uses more margin than just being long?

[beefcaketrade]

If the borrow costs are say, 20%, and the options don't reflect that, then you simply do the following transaction:
Buy shares in the stock, lend them at 20%. Buy the ATM put and sell the ATM call, which if put call parity is holding will cost you only the transaction cost (which is far less than 20%). No matter what the stock price does, your synthetic short exactly balances your actual long, and you get a free 20% out of the deal.
Sure as a retail guy you may not be able to capture the 20% lend rate, but enough institutional guys can that they'd arb that opportunity away in less than a second. And it doesn't matter that the rates change every day, as long as that lending rate exceeds your round trip transaction costs on the synthetic short you're making risk-free money.
But that's all theory. Take a look at a stock with a high borrow rate; since you're with IB I can tell you that you can add a column to see this in an annualized percentage basis for any stock, or at least you used to be able to. Then see if put/call parity holds for ATM options for that stock. It won't (but if I'm wrong, please let me know the stock!)

IB has the SLB database, which you can view with your browser to see availability and borrowing charge.

I'm not trading now so can't see details but I recall borrowing cost for say TSLA was super high back a few years ago. Probably still high now. I think like 60-80% per annum compounded daily or something.

Also, even if you can put your stock up for borrow, it is not a steady sure income as it has it's own supply/demand nature to it I'd imagine. I'd assume demand for short borrowing varies as a natural course of trading. So this isn't a guaranteed source of income and thus not really a fool proof arb to go delta neutral and rely on stock loan for income. You can sit on your stock and potentially nobody may borrow it. In that case, with the variability in demand for shares even at a high rate (although the high rate will suggest there is at least demand, or supply is low), how exactly do you price options to reflect the lending market rate?

I don't think the put call difference will reflect that high of a loan borrowing rate though at some 60-80% borrow rate. That will make the cost of options very high. Say you do a synthetic short out one year, and in theory you're saying there should be an initial debit to set up each synthetic short position to reflect interest charged for high cost of borrowing. If say it's at 60% borrowing rate per year. Shorting 100 shares @ $278 costs 22.8K in lending cost? For sure the debit for a synthetic short won't be 22.8K per synthetic short position one year out. That's super high. So does that suggest the options are not fully pricing in the lending market? I'm just not sure how the mechanics of it works.

Also, the stock lending market is kinda small. It's hard to imagine a small niche segment affects the options market, which is a much larger and more regularly traded market. It could, I dunno.

Can look at more specifics later. But it is an interesting point.

 

[Sig]

IB has the SLB database, which you can view with your browser to see availability and borrowing charge.

I'm not trading now so can't see details but I recall borrowing cost for say TSLA was super high back a few years ago. Probably still high now. I think like 60-80% per annum compounded daily or something.

Also, even if you can put your stock up for borrow, it is not a steady sure income as it has it's own supply/demand nature to it I'd imagine. I'd assume demand for short borrowing varies as a natural course of trading. So this isn't a guaranteed source of income and thus not really a fool proof arb to go delta neutral and rely on stock loan for income. You can sit on your stock and potentially nobody may borrow it. In that case, with the variability in demand for shares even at a high rate (although the high rate will suggest there is at least demand, or supply is low), how exactly do you price options to reflect the lending market rate?

I don't think the put call difference will reflect that high of a loan borrowing rate though at some 60-80% borrow rate. That will make the cost of options very high. Say you do a synthetic short out one year, and in theory you're saying there should be an initial debit to set up each synthetic short position to reflect interest charged for high cost of borrowing. If say it's at 60% borrowing rate per year. Shorting 100 shares @ $278 costs 22.8K in lending cost? For sure the debit for a synthetic short won't be 22.8K per synthetic short position one year out. That's super high. So does that suggest the options are not fully pricing in the lending market? I'm just not sure how the mechanics of it works.

Also, the stock lending market is kinda small. It's hard to imagine a small niche segment affects the options market, which is a much larger and more regularly traded market. It could, I dunno.

Can look at more specifics later. But it is an interesting point.

Basically by definition if a stock is "hard to borrow" or has a high interest rate, then if you offer to lend it you'll be able to lend it. The lend market is a market like any other, there's a bid/ask on lending rates and if you offer to lend your hard to borrow stock for less than then the current lowest interest rate your stock will be the one that is lent (lended?) Keeping in mind that we're talking institutional level here, I think even IB got rid of their lending market and just does the 50/50 split thing now which is probably what you're thinking about.
For no arbitrage to hold, even over a couple days, the put/call parity has to reflect the interest rate for the short. If not, as I described in my last post the institutional guys could make free money. Even if the borrow rate goes to 0 after a few days, if put/call parity held then they'd capture the entire borrow rate for those few days with zero risk.
It may very well be that your broker gouges you with the borrow rate and the rate you pay is more than is reflected in the break in put/call parity. But if you were institutional it would be exactly equal after taking into account transaction costs.
Because of the potential of broker gouging, I will concede that as a retail trader you may be better off with the synthetic than the actual short, kind of like how you capture/pay the institutional interest rate when you trade ES vice borrowing on margin to buy SPY, so I guess I may be getting a little pedantic, but interesting conversation hopefully nonetheless.

 

[beefcaketrade]

Yea probably. But the retail synthetic shorter would still get creamed with the spreads where they are. Frictional losses from wide spreads probably cost more than the 60% interest charge within the short swing trade holding period.

 

[Sig]

Yea probably. But the retail synthetic shorter would still get creamed with the spreads where they are. Frictional losses from wide spreads probably cost more than the 60% interest charge within the short swing trade holding period.

Good point.