Hard-to-borrow call-put arb

Discussion in 'Options' started by heech, May 12, 2009.

  1. heech


    Here's another one of those stocks that people are dying to short, leading to huge put/call arb numbers:

    NAT, trading $36.50
    June 35 call: $2.20
    June 35 put: $3.20

    Borrowing costs as per IB: 50.25%.
  2. Do you believe that there is "free money" to be made in the stock and/or its options? :cool:
  3. dmo


    Glad you figured out the borrowing cost before jumping in. Spin is glad too - saves him from having to read my hard-to-borrow arb story again!
  4. spindr0


    Au contraire mon ami. I think that your hard-to-borrow arb story is very co, co, coh, coheh. cohare, coheer, cohairant ! :)

    My borrowing pound of flesh last month was just short of $500. And I did that voluntarily :eek:
  5. Still , isnt the cost of carry less than the arb?

  6. hi. dmo, could you post your link to the above reference.

    I also use IB and I was unaware that there are borrowing costs other than the quoted option price. for certain STOCKS.

    does IB specifically mention these costs before we initiate the transaction. for the given stock ?

    also, I have been shorting some hard to borrow stocks.(NILE) in IB and so far dont see any borrowing costs fees. I will double check with them Monday.
  7. dmo


    No, IB mentions nothing. That was the point of those threads - how opaque IB is about the high borrow costs. The main thread was http://www.elitetrader.com/vb/showthread.php?s=&threadid=134814 - also some followup in http://www.elitetrader.com/vb/showthread.php?s=&threadid=161439
  8. heech


    Only a little bit, and it's not clear at all you'll get anything after commissions.

    C + K = S + P

    So... in the above case: $2.20 + $35 != $36.50 + $3.20...

    ... there's a free $250 in it for you if you:

    - sell 1 put contract (+$320)
    - buy 1 call contract (-$220)
    - short 100 shares ($3650)
    - And hold until expiration (-$3500 at that point).

    If stock ends above strike, you can use the call to close out the short. If stock ends below strike, the put will be exercised and closed out the short.

    The problem is borrowing $3650 at 50% annual. I think that rate is the simple rate... with about 6 weeks to go, that means borrowing cost is ~$210. Throw in commissions, *and* throw in the risk that borrowing cost on NAT can go even higher over the next 5 weeks... there's really nothing there.
  9. heech


    Yep, those threads alone make EliteTrader a worthwhile exercise for me. I had *no* idea that was an issue until I came across them.

    Now, I check borrowing costs for my short positions every day, ready to close out if needed.