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I've seen brokerages intensely advertise their margin interest rate, and I've seen this being use to compare them. Why is this important, when you can get a low interest rate loan using in the following way?

  • Sell PUT $X expiring in 1 year
  • Buy CALL $X expiring in 1 year
  • Short 100 stocks at $X
  • Close all positions at the end of the year for a slightly larger amount (denoting interest).

I've tried using the method above, and the rate is usually around 1%, which is lowest than the margin rate of any brokerage I can find.

Am I missing something here, is there any real value in margin rates, or is this all a marketing sham?

2 Answers 2

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There are several things that you 'might' be missing.

You must pay a borrow fee for borrowing the stock to short. For liquid large caps it's a fraction of a percent - low but it still must be paid.

You wouldn't use a hard to borrow stock initially but if something happened to make it HTB, you might get a forced buy in. That often happens in the after market when B/A spreads are wider. You'd then have directional risk since options won't trade until 9:30 AM EST the next day. And even you didn't get a forced buy in, the borrow rate could zoom up. Not likely a problem with IWM or SPY.

If there's a dividend, you'll have to pay it to the lender on the Pay Date if short on the ex-date.

Calls cost more than puts due to the carry cost (interest rate). You're buying the call and selling the put so that's a net debit.

If the underlying drops a lot and your short put gets deep ITM with no time premium remaining, it's likely to be assigned early which means B/A slippage and additional commissions if you're still paying them.

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  • Thanks so much for this answer! This makes a lot of sense. Is there a more straight forward way I can go about borrowing without directly paying the crazy margin interest rates? (e*trade is 8%)
    – Gill Bates
    Jun 29, 2021 at 1:26
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    Take a look at a box spread which is two vertical spreads with the same strike prices and expiration dates. They are used for borrowing or lending at implied rates which if executed properly should be less than margin borrowing. Read up on them and make sure that you cover the effect of pin risk. Jun 29, 2021 at 2:14
  • @Gill Bates to avoid early assignment you could look at European-style options (for example SPX index options) rather than American-style options on ETFs/stocks
    – 0xFEE1DEAD
    Jul 13, 2021 at 19:08
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In addition to what Bob wrote:
Brokers have little else to advertise. With unlimited free trades, free accounts, and free anything, how can a broker differentiate itself from the competition? Aside from a nicer logo? So they go for secondary, less important things.
Depending on your trading patterns, they might become relevant, sure, but as you said, for most users / activities, they have negligible impact.

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  • To be fair the fees for options/future are quite high in most. Avoiding the 50c/option fee of e*trade would be likely enough to make me change broker.
    – Gill Bates
    Jun 30, 2021 at 3:13

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