Say I'm shorting 100 shares of SPY ETF, and I intend to keep them for 30 days, SPY is now trading at $337 / share. If I were to buy them, I'd have to pay $33,700 (will ask a question on that later). But instead I'm shorting them, meaning I borrow them from the broker. In this case the broker would charge an interest rate which seems to be around 1.5% per year, with 360 days. So the interest paid on borrowing the ETF would be (30 / 360) * (1.5 / 100) * 33700 = $42.125. I'm interested in computing how much money (investment) do I need for such a position. If buying the ETF I'd need to pay the full amount, so $33,700. But I'm shorting it, so I only need to provide the required margin, which seems to be in the 50%. So only $16,850 plus the interest on the borrow. But then, I also purchase an ATM call option to protect me in case the stock goes up. The option costs about $8.7, so at x100 contract size, I'm paying $870 for it. But then again! There's no need for the 50% margin since my position is fully protected. As far as I can see it, my required investment would only be cost of option + cost of borrow, so $870 + $42.125 so roughly $913! When I make or lose money, I need to compute them against the amount I'm required to put in. In this case, short SPY + buy call, is it correct to consider my investment is $913? Or do I need to consider the full price for the ETF, as if I were buying it, so $33,700. I mean like the difference is huge, a 37x leverage. And then the question on when I buy the ETF. If I buy 100 shares "naked", I need to come up with $33,700. But if I buy a put contract for the same price of $870, then do I REALLY need to come up with the full amount of $33,700 to buy the ETF? Is it correct to consider I'm using borrowed cash just like I use borrowed stock in the short case? So instead of $33,700, I only need to come up with the interest of $42.125 for 30 days? So in both buy and sell of ETF, if I use an option to protect my risk, the cost of investment goes down by a factor of 37x?
Interesting scenario(s), indeed. IMO logically consistent, but I doubt the broker will accept this :-( Looks like a "chicken or the egg" causality dilemma Just a minor fix: if margin is 50% then the interest in your calc is to halve too. As basis for the P/L calc I would take the paid total when opening the positions.
Right. But I'm roughly interested in the amount required, if I have to put up a deposit of $16,000 then +/- $20 don't make any difference. Because there's the issue on how much money I make. Say I make a profit of $500. If I made them on a deposit of =~ $1000, then I made a 50% return! (Of course I can lose 100% of my deposit). But if I made them on $16,000, that's about 3% profit, or I can lose about 6% of my deposit if market goes against me. So how do I report the PNL to "investors"? +50% / -100% or +3% / -6%?
Why should margin not be related to the options board? Each broker might have different margin requirements, but this still does not change the fact that margin is related with options and stocks, and also the P/L calc he had asked.
Learn to write concisely. Organize your math equations and name the variables. You will probably find that you had the answer, but you were just dumping your brain thru your rear end.
You are correct that when you short the stock and buy a call, you no longer have the unlimited risk associated with short stock. But I don't think any broker will reduce the margin on the short stock just because you have a long call. Even if your broker wanted to, I'm not sure US regulations would allow such a reduction. A couple of observations: Short stock plus a long call is a synthetic put. In theory, the position should behave exactly as if you had simply purchased a long put. In reality, there are variables that can change the behavior of each position, e.g., when you are short the stock, you have to pay dividends to the lender. So the two positions are not always perfectly equivalent. But in many cases, you can accomplish the same thing buy simply buying a put, and that has lower margin than short stock. And you can effectively short stock, at a lower margin rates, by selling a call and buying a put (at the same strike and expiration). Here again, in theory, if you are short the call and long the put, you should get the same outcome as short stock. Just compare the P&L graph and you'll see why. This is often referred to as synthetic short stock. At most brokers, synthetic positions have lower margin requirements than long or short stock. BMK