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The cost of borrowing stock to short it is often higher than the corresponding option premiums. You also generally need less on deposit to execute the options
by fredkbloggs 11y ago
The cost of borrowing stock to short it is often higher than the corresponding option premiums. You also generally need less on deposit to execute the options strategy (that is, your value at risk will be lower, as will your margin interest cost).
I could retort with an equally glib "why don't employers just pay their employees in cash?"
- lordnacho 11y agoWell, they're trying to pay you in stocks to make you feel like you need to work harder. (I don't get what you are retorting to?) If you work for a public company, you can short circuit this by removing the risk (via options or shorting) and effectively taking the money immediately. I suppose they might have something in the contract to stop this from happening, but I don't know what the standard practice is.
- eropple 11y agoMost companies that are trying to pay you through equity are doing so not (just) to make you feel like you need to work harder--which is a joke for the obvious reasons--but, and this is no less important, so they don't have to pay you in cash. Cash is expensive and in the present. Stock is a question mark nobody has to care about for years.
- fredkbloggs 11y agoExcept that cash has never in all of recorded human history been cheaper. So the "cash is expensive" argument doesn't really hold water. Put another way, something else must explain why equity compensation is more common now than in the past, especially in light of how cheap cash is.
- sokoloff 11y agoCash for secured, credit-worthy borrowers is extremely cheap. Cash for startups with strongly and increasingly negative cashflow is NOT cheap.
- s73v3r 11y agoIn this case, cash is still more expensive because they have to have the cash, and they have to have it now. It costs almost nothing to issue the tiny percentage of stock you'd receive, and they don't have to worry about actually paying anything for a while, if ever.
- encoderer 11y agoI have a small disagreement with your first point. It can happen, and even more often there are no shares to borrow from your broker at all, but it's not "often" that way. Options trades are not brokered between two clients the way equities are. You're trading with a market maker, and that's true whether you're buying to open or selling to open. When a market maker sells you a put, the first thing he does is offload that risk by shorting the stock. He's not paid to take directional risk. And that put premium needs to cover the carrying cost of that short position, in addition to things like implied volatility, time value, etc. You are right that you get leverage with options, but there is no free lunch.