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Some stock brokerages provide opportunities for their clients to earn some money by allowing the brokerage to lend out the client's shares to short sellers. Common names for these programs are: "securities lending program", "fully paid lending income program", "stock yield enhancement program", etc. In general, the higher the short interest in the stock, the higher the borrowing cost for short sellers, and the higher the income from securities lending.

However, one could potentially earn more money by converting one's stock position into a synthetic long stock position. When there is high short interest, the prices of put options would presumably be high. By selling the stock, selling a put option, and buying a call option, one earns the full value of lending out one's shares from the sale of the put option. Is it true that one can earn more money from such synthetic long stock positions than by enrolling in securities lending programs?

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  • If you already own a stock and create a synthetic long, then you've doubled your exposure, not just added income.
    – D Stanley
    Sep 8 at 13:46
  • @DStanley No, the stock position is converted into a synthetic long. In other words, sell the stock, sell put options, and buy call options.
    – Flux
    Sep 8 at 13:49
  • Ah OK I don't see the "sell the stock" part in the question.
    – D Stanley
    Sep 8 at 13:49
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However, one could potentially earn more money by converting one's stock position into a synthetic long stock position. When there is high short interest, the prices of put options would presumably be high. By selling the stock, selling a put option, and buying a call option, one earns the full value of lending out one's shares from the sale of the put option.

While correct, this wording is potentially confusing. You should enhance your explanation by stating that one is selling to close one's equity position and then opening a synthetic long option position.

In theory, there is something to your premise. Thought in reality, perhaps not as much as you'd think. For starters, call premiums are higher than put premiums so synthetic longs tend to start out at a debit. Yes, it's a low interest rate environment so these days, this disparity isn't as significant.

Of greater significance is the fact that when there is high short interest in the underlying, option spreads tend to be much wider and that increases the cost or lowers the credit received for buying the synthetic.

I'd suggest that you find some high short interest situations and evaluate the synthetic long possibilities in real time to see how viable your premise is.

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