tell me why this isn't easy arbitrage...

[huge]

Quote from atticus:

My money is on M22's suggestion that it's LNKD. OP, this isn't news. IB was charging 80% to hold the short, and there is no guarantee that you'll get to maintain that short position.

Funny how he asks for help but doesn't reveal the ticker. A real stand-up guy.

atticus, I'm sorry if my posts have annoyed or offended you. I am truly grateful for the replies I have received here - even yours was helpful to me in spite of its tone. In my defense, I think if you read my posts it should be pretty clear that I wasn't ever claiming that I was bringing "news" to the table. I saw something that to my untrained eye looked like a profitable arbitrage opportunity, but it seemed unlikely that such a "free lunch" should exist, so I posted my questions in hopes of benefiting from the wisdom of traders more experienced than myself.

Thanks (to you and everyone else) for helping to further my trading education, and apologies again if I have ruffled any feathers along the way.

 

[huge]

OK, so I think you guys are right (thanks again) that the stock is probably HTB, and if brokerages are charging a fee/interest to short the stock, then that would explain the situation pretty well. I was aware of the concept of a HTB list, but not that I might be charged a substantial fee to short. I have a couple of further questions if I haven't overtaxed your patience...

If a stock is HTB and there is a put/call pricing disparity, is that a reliable bearish indicator? (Albeit one that is very hard to exploit since you can't short the stock and the puts are overpriced) Or is it just as likely that the underlying stock is headed for a short squeeze?

Am I correct in thinking that in this situation you would be throwing away money to buy the stock directly? I guess the exception would be if you were day-trading ... but if you were planning on holding past the options expiration date then taking a synthetic long position would get you a significant discount to the stock price, correct?

Stocks move on and off the HTB list, right? If a stock moves off the HTB list, does the put/call disparity disappear either immediately or pretty quickly?

Is the HTB list some centralized thing, or does each broker have its own HTB list and its own fees?

Thanks for your continued willingness to educate a humble newbie...


P.S. I found another link to an article that almost exactly addresses my situation:

http://blog.discoveroptions.com/?p=876

 

[atticus]

Quote from huge:

atticus, I'm sorry if my posts have annoyed or offended you. I am truly grateful for the replies I have received here - even yours was helpful to me in spite of its tone. In my defense, I think if you read my posts it should be pretty clear that I wasn't ever claiming that I was bringing "news" to the table. I saw something that to my untrained eye looked like a profitable arbitrage opportunity, but it seemed unlikely that such a "free lunch" should exist, so I posted my questions in hopes of benefiting from the wisdom of traders more experienced than myself.

Thanks (to you and everyone else) for helping to further my trading education, and apologies again if I have ruffled any feathers along the way.

I'm annoyed by the fact that you are looking for help yet don't feel the need to reciprocate with the ticker. Of course it's meaningless as there is no arb, but I find it odd that you expect a handout.

 

[spindr0]

Quote from huge:

If a stock is HTB and there is a put/call pricing disparity, is that a reliable bearish indicator? (Albeit one that is very hard to exploit since you can't short the stock and the puts are overpriced) Or is it just as likely that the underlying stock is headed for a short squeeze?

HTB doesn't predict direction but it's often an indication that a sizable move may occur. The underlying reasons for HTB can vary. The most obvious is a valuation/solvency question where sellers believe the UL is going down. Another is a small public float where modest amounts of borrowing affect HTB faster.

You can also have various arb situations. For ex, a risk arb in a takeover (buy the target, sell the acquirer). Another is a large offering of pfd shares that affects borrowability (buy the pfd, short the comnon). I got caught up in a Citigroup conversion two years ago where I ended up 10,000+ short shares of at $2.28. You don't need much of a move to profit intraday when you're trading several 1,000 shares at a time. Problem #1 was that the borrow rate was 102% and that was a huge impedance. Problem #2 was that the unwinding of the arb caused C to rise. I didn't hang around for long

And as you noted, you can have short squeezes due to market perceptions and/or borrow restrictions. This can cause early call exercise since MM's short stock for reversals ... a ripple effect.

Long story short: Market forces determine direction, not borrowabiility.


Stocks move on and off the HTB list, right? If a stock moves off the HTB list, does the put/call disparity disappear either immediately or pretty quickly? Is the HTB list some centralized thing, or does each broker have its own HTB list and its own fees?

Yes, stocks move on and off the HTB list but it's usually a process that occurs over time. As the short interest drops, the borrow fees gradually reduce (daily reset). Concomitantly, the p/c disparity eases. The removal from the HTB list occurs at some arbitrary level, a "one moment" event.

The HTB list is a common denominator but each broker decides how much it wants to charge to lend as well as what how much the borrowing firm hammers you as well