Selling deep ITM calls @ parity as alternate to short stock

Discussion in 'Options' started by J-Law, Nov 30, 2011.

  1. J-Law


    Was talking to a former CBOE floor trader this am. He suggested in lieu of all the restrictions, fees, lack of availabity when trying to establish a short stock position was to sell deep ITM calls for parity. Basically, understood him right up to the "parity" part.

    I understand parity, but can someone explain "parity" in context to this position. He obviously is trying to sell at more advantageous pricing. Just not getting the swing in regard to the trade here.

  2. FSU


    When he says parity, he means selling the call with no premium to the underlying. For example if the stock is at 40, and you sold the 20 calls for 20, you would sell them at parity.

    The problem with this is if you are doing this because a stock is hard to short, you will be assigned on your short calls.
  3. rmorse

    rmorse ET Sponsor

    Stock trading at 50.00
    Call Option Strike 75.00
    Parity is 75-50=25.00

    If you sell the call for parity, 25.00, there is no time premium. The option will move 1:1 with the stock unless the stock drops a lot.If the stock is that hard to borrow, you might not get to sell for parity, and you might get assigned early. Not as easy to execute as you would think.
  4. Wow, I'd open an account for trades like that :)
  5. If it's truly HTB then you're not going to get parity on the deep call. The natural short will be far less than $40/share. Calculate the synthetic short at any strike and you'll find the embedded financing as well.

    It's odd that we have dozens of these threads when all it takes is to run the synthetic. I don't think Bernanke is underwriting short sellers, in fact, it's quite the opposite.

    A cboe local told you this?
  6. Archin


    Someone on bloomberg yesterday suggested buying puts deep itm for the same reasons.
  7. OK, but that's also nonsense. At least you're not getting assigned, but you're financing the HTB short.
  8. rew


    What does HTB mean?
  9. Hard to borrow.
  10. Unless you work at a large bank, you really can't avoid the cost of borrow.
    #10     Nov 30, 2011