Hate to jump in on page 7 of this Sig, but this really isn't the case. The way the profit is made from the options is being short the stock and then shorting the put and buying the call. Here you are in a reversal. You have sold the combo way over fair value and are neutral because you are short stock. If you are able to get a guarantee of short stock you lock in this "over fair value" profit. You can replicate a short stock position buying a put and shorting a call, but you are now essentially "paying up" for the combo and thus paying the high short stock rates.
Actually this is one of the only useful posts on this thread, so thank you for that. My question is this: 1. You assume that there is some sort of unfair activity going on whereby a group has essentially cornered the available short supply and is doling it out at a higher borrow rate than risk adjusted returns would warrant and making a windfall profit from that. 2. In this case, put-call parity will be violated because it costs extra to arb with the short since you have to pay this high borrow rate if you do arb. As a result, the put will sell for more than the call around the ATM strike to reflect this. 3. In this case, anyone who sold the put and bought the call would be reaping this same windfall profit as the nefarious guys that cornered the market on shortable shares of the stock, wouldn't they? I'm not talking about locking in profits, obviously the high borrow costs should exactly cancel out the extra profit on the put. I'm talking about essentially a mispricing of the option because of the manipulation. Obviously stocks with a high borrow rate have a high chance of losing value, hence the borrow rate, and in an efficient market there is a market driven rate that accounts for this risk. In other words just because a stock has a high borrow rate doesn't necessarily mean that rate is too high. But if IBM suddenly has a 15% borrow rate with no underlying issues, that behavior would indicate some kind of nefarious manipulation and anyone could capitalize on that the same as the nefarious manipulators by selling the ATM put and buying the call, couldn't they? You're not guaranteed profits, but assuming IBM still has relatively symmetrical variance you've got the same probability tailwind as the manipulators.
Hey just checking back into this thread that really blew up. The options approach won't work with most of the issues I'd be interested in because they aren't optionable. Carry on : )
having said the above the comment by FSU was most useful and should be included in any discussion on synthetic short position. to make it crystal clear the "needy individual" in question was NOT fSu.
http://www.thetradenews.com/Regulation/Ex-head-of-operations-at-ITG-charged-over-ADR-failures Anthony Portelli was responsible for ITG’s securities lending operations and the compliance around pre-release agreements for ADR transactions. The Securities and Exchange Commission (SEC) found under Portelli’s supervision, ITG’s securities lending desk failed to determine whether proper amounts of foreign shares were owned and held by ITG.