Shorty Fire In AIG | Blog – Daily Options Report
Simple. You can short calls and buy puts on the same strike and class. Let’s say you short 1 October 45 call and buy 1 October 45 put. It’s effectively identical to the risk/reward of shorting 100 shares of stock.
But here’s the catch. When a stock is difficult to borrow, you will have to short the stock at a discount to the price you see on the board. In the case of AIG, the October synthetics trade for a roughly 50 cent discount to AIG stock. Sounds like a ripoff, no?
Well, it’s really not. If a stock is difficult to borrow, your clearing firm may still let you short it, but you will get hit with interest charges. Those rates may vary, but the discount of the synthetic to the stock itself will reflect that “cost” between now and when the options expire. At least the current cost.
So in other words, even though the option synthetic seems cheaper than the stock, it’s really not. It reflects the market rate of the carrying cost, in addition to a premium reflecting the risk of getting bought in on the short stock.