GWH: What am i missing?

Discussion in 'Options' started by JamesJ, Oct 12, 2021.

  1. JamesJ

    JamesJ

    upload_2021-10-12_17-35-31.png

    taking prices around midpoint.
    -12.5c
    +15c
    at 2.40 credit

    -15p
    +12.5p
    at 0.35 credit

    Total 2.75 credit.
    Max Loss 2.5.

    Free lunch?
    What am i missing?
    Early assignment should not be an issue on the call as i could just exercise the other leg.
    It's a new stocks, while its not avail to borrow right now, borrow fees are not high (around 6%).
     
  2. zdreg

    zdreg

    If it can't be borrowed how can there be a borrowing fee?
     
  3. JamesJ

    JamesJ

    ibkr quotes this fee but has none avail. others probably have some avail.
     
  4. You could lose one business day to exercise the other leg i.e. up to 3 calendar days in terms of cost of carry (whenever the week-end is included) if the delivery date is taken into account (1.2 cents par share).

    I think bid-ask spread might be significant.
     
  5. JamesJ

    JamesJ

    I'd like to give a quick look at results of this trade in order for others who might run into something like that.

    I did end up selling the 12.5/17.5 call spread at around 4.8$: -12.5c + 17.5c
    and sold the 12.5/17.5 put spread at around 0.8$: -17.5p + 12.5p

    Seemingly giving a risk free profit of 0.6$ per contract.

    However:
    - i did get early assigned on the 12.5 calls (the same day i took the position) leaving me with stocks short.
    - Borrow fees went through the roof the following days, i paid 88.81% p.a. on my short position for 4 days (weekend also due to T+2).
    - Exploding borrow fees gave me a sweater, as even after having positions closed you are exposed to a further surge (T+2 settlement).
    - i did close part of the put spread and short stock position early.

    Final result:
    Borrow fees ate up most of the seemingly risk free.
    I still did manage to get a profit out of it, i think due to pretty good execution and options market pricing in an even higher borrow fee.

    Advice:
    - Be aware of borrow cost risk!! You are at the mercy of brokers even after having closed your position due to T+2 settlement.
    - If borrow fees went to 200, 300 and more i would have incurred a huge loss having to pay that over the weekend. I've seen borrow fees exploding to >500% (NKLA and also SPRT had huge fees) around special events or when extreme shortage of locates.
     
  6. MK020

    MK020

    Thanks James for the follow up to your situation.

    Do you know what would have happened if IBKR didn't have any shares to lend you (as you stated was the case at the start of the trade)? Also, were you assigned after hours? Why did your broker have to lend the shares instead of just having your account buy them? I'm new to American-style options.