Why SHLD December PUTs so expensive?

Well call me a hopeless romantic, but I had to try it. I just did the Oct reversal for a "lock" of 2.75. Doesn't make a bit of sense to me, but there it is. IB didn't seem to have a problem with me borrowing the shares.

I can't help but suspect there's something going on with the stock that will come and bite in me in the hind-quarters, but I had to try it. We'll see at expiration in Oct. if it was real or an expensive illusion.
 
There is no such thing as a free lunch.

While it is possible to borrow SHLD there is a price to be paid in the form of negative rebate. This cost of borrowing the shares will have the effect of lowering your net selling price. This must be taken into consideration.

As a point of reference the SHLD EFP market is implying a 22% annualized negative rebate for both the Sept and Oct SSF Futures which is a pretty good proxy for what the actual charge will be to borrow.

Traders should price this in.

Best
 
Quote from OneChicago:

There is no such thing as a free lunch.

While it is possible to borrow SHLD there is a price to be paid in the form of negative rebate. This cost of borrowing the shares will have the effect of lowering your net selling price. This must be taken into consideration.

As a point of reference the SHLD EFP market is implying a 22% annualized negative rebate for both the Sept and Oct SSF Futures which is a pretty good proxy for what the actual charge will be to borrow.

Traders should price this in.

Best
More...

That's why I'm always sceptical of any mispricing, because it usually means I'm missing some piece of information.
Thanks for the info OneChicago.
 
Quote from OneChicago:

There is no such thing as a free lunch.

While it is possible to borrow SHLD there is a price to be paid in the form of negative rebate. This cost of borrowing the shares will have the effect of lowering your net selling price. This must be taken into consideration.

As a point of reference the SHLD EFP market is implying a 22% annualized negative rebate for both the Sept and Oct SSF Futures which is a pretty good proxy for what the actual charge will be to borrow.

Traders should price this in.

Best
More...

David - would IB just charge me for borrowing the stock with no warning? Hardly seems kosher.

IB - are you listening? Any comments?
 
These rates are subject to change intraday and sometimes quite significantly. Your brokerage firm may not know what they will have to charge you. I don't know. What is clear is that no brokerage will lend to you if they can get more money from lending to someone else. Brokerages are not in business to pay X amount to borrow stock and lend it to a customer for less. They will pass on the fees that they are charged.

In any event the SSF price will reflect the pressures from stock/loan. You should be able to see the EFP markets from the IB TWS. Make sure you toggle to display the EFP market in annualized interest rates. This will help you.


Best.
 
Quote from OneChicago:

As a point of reference the SHLD EFP market is implying a 22% annualized negative rebate for both the Sept and Oct SSF Futures which is a pretty good proxy for what the actual charge will be to borrow.

Traders should price this in.
More...
Wow! It seems much more attractive than reverse conversion. Margin req for EFP is only 5% of stock value. And SSF spread is narrower.
Just free $150 for each $450 of required margin on SHLD EFP.

What the kind of borrowing costs are you talking about? I often borrow ample quantity of "Not shortable" stocks for SS but no interest charged for it. May be interest paid for cash proceeds from SS is lower (say 0.8-1% instead of usual 1.69%), but no extra charges.
 
Well if you are able to borrow SHLD and short it without paying any fees then you should and immediately purchase either the Sept , Oct or Dec SSF.
As of 1:20pm CT the following prices are observed in SHLD:

Stock: 86.17 at 86.23
Sep SSF 84.33 at 84.71
OCT SSF 82.29 at 82.85
DEC SSF 80.20 at 80.78

All the SSF bids and offers are 10x10. Remember each SSF represents 100units of underlying.
There is no Dividends paid. There is a positive interest rate and postive time environment which would mean the forward value of SHLD (the SSF) should be trading at a positive basis. But it is not.

So if you are able to sell SHLD short without paying any fees then you could lock in risk-free profits by selling the Stock and buying the SSF out to time. At expiration the SSF will bring stock into your account to satisfy the short sale and the position will go flat. But (using Sept SSF) you purchased the SSF at 84.71 and sold the stock at 86.17 meaning you made 1.46 in roughly 4 weeks.

So if you are able to borrow the specials stocks without paying a fee then you should be an active participant in the SSF market.

On the other hand if you are a natural investor to buy and hold these stocks the Stock Loan pressure on the SSF pricing provides a means to purchase the position by buying the SSF at a discount to the cash market and holding on to it through expiration at which time the CUSIP will replace the Future and you will have your long position you wanted but at a lower cost.

Best
 
Quote from dmo:

David - would IB just charge me for borrowing the stock with no warning? Hardly seems kosher.

IB - are you listening? Any comments?
More...
At times IB has charged me very small fees for shorting stock. I would be horrified if they charged me anything significant without some warning.

As I recall their web site warns of such fees. Years ago when I read it I assumed, possibly incorrectly. that they were very small.

Be good if someone can shed more light on this.

Don
 
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