There is zero chance of assignment on short puts (absence a mistake) The puts are trading at a big premium do to hard to borrow status.
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- Thread starter FSU
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There is zero chance of assignment on short puts (absence a mistake) The puts are trading at a big premium do to hard to borrow status.
High hard to borrow will keep even deep ITM puts from approaching parity.
Its not the low float, its the hard to borrow status. When a stock is hard to borrow the puts are bid up and the calls are sold down. To replicate short stock, you would buy a put and sell the same strike call. This reversal is more costly and thus more premium in the puts. The deep calls trade parity and are often assigned in this situation, but the puts have premium.
Okay. that has nothing to do with absence of shares in the market. It has to do with the long holders not willing to lend their shares out.
When Citigroup was trading around $1 (2009), there was talk of a tender and the borrow cost was $1. Calls were being excercised as the stock rallied. There were plenty of shares in the market, just everyone needed to be long the physical shares instead of in-leui.
*shakes head* Low float means less shares available to borrow and particularly when the options trading concerns a multiple of the full float of the company including the shares still in lock-up.
Low float means not many shares in circulation. It has nothing to do with borrow. Borrow can be high in stocks with high float (like my Citigroup example from 2009).
You and FSU are talking about hard to borrow stocks not necessarily stocks with low floats. That is what was confusing.
It’s extremely rare that the options open interest will drive the borrow. Typically it’s the shorts who do - the options market are along for the ride.
And a short put can be exercised just as easily if interest rates justify it.
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What I dont understand is that you dont see the two are related. Yes the stock has a dearth of people willing to borrow the stock in the market and thats because there is a lot of demand to do so., If more bits of paper were available to be borrowed the pressure would be less.
The hard to borrow status and increased cost to borrow is what creates the higher put premium.
Of course Low float is one of the factors that cause the hard to borrow status. Demand has to be higher than the float. Low float alone will not cause hard to borrow.