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Rooting for Trump to fail has made his stock shorters millions

Waiting for the stock to drop is especially painful to “short sellers,” who pay a fee to borrow shares owned by others. The idea is to quickly sell them on a hunch they will be able to buy the same number of them later for much cheaper before having to return them to the lender. That allows short sellers to pocket the difference, minus the fee, which is usually nominal.

In DJT’s case, the fee is anything but nominal.

It was costing 565% a year at one point earlier this month, meaning short sellers had only two months before any possible profits would be eaten up in fees, even if the stock went to zero. It’s a rate so off the charts, that only three other stocks in recent memory have exceeded it, according to data from Boston University’s Karl Diether and Wharton’s Itamar Drechsler, who have studied short selling back two decades.

I can see why put options can be very expensive if everyone believes a stock will go down, but I don't understand why the fee to short a stock can be so expensive. After all, regardless of how volatile a stock is, you're still promising to return the stock eventually. Can anyone explain the highlighted sentences?

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    Supply and demand? Everyone is trying to short it
    – littleadv
    Commented Apr 28 at 4:11
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    Someone needs to lend for you to borrow
    – littleadv
    Commented Apr 28 at 5:01
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    Right. But they don't lend for free. If they're holding a stock that everyone else expects to go down - they want to make some profit too.
    – littleadv
    Commented Apr 28 at 5:46
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    Because someone is willing to pay 500% to borrow it?
    – littleadv
    Commented Apr 28 at 6:05
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    Several points... FWIW, a few days ago I saw a borrow rate for DJT near 750%. High demand for borrowing shares to short reduces the number of shares available. The harder it is to borrow a stock, the higher the borrow rate. Risk is also factored into this by brokers. Option prices are interconnected through arbitrage. Both puts and calls become more expensive when pricing variables increases (interest rates, borrow fees, implied volatility). It's not just puts. Commented Apr 30 at 4:12

2 Answers 2

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When an investor shorts a stock, they are borrowing someone else's shares to sell. That someone needs to a) agree to lend their shares, and b) be compensated for that.

As such, this is a supply and demand problem: there are a lot of people who are trying to short this particular stock for obvious reasons, and not a lot of sophisticated enough investors holding it, for similarly obvious reasons. So those who understand the situation and still hold the stock do so specifically because there is a HUGE demand to borrow it. As you yourself said, at one point one could get 500% annual return just by lending the shares out, even if they eventually drop to $0 value.

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  • A shareholder often does not explicitly agree to lend a particular stock, it comes from their margin account where the brokerage has the right to loan it out.
    – user71659
    Commented Apr 29 at 20:01
  • No one in their right mind holds onto very risky high priced long stock expected to decrease in value in order to collect a high borrow fee. Commented Apr 30 at 4:14
  • I fail to see what being a "sophisticated enough investor" has to do with this. If the shares are owned in a margin account, they can be loaned by the broker regardless of the shareholder's mentality. There is no borrow fee for shorting the stock and covering it the same day. Therefore, many traders pile on during the day and cover by the close. The lender doesn't necessarily receive (500%/365)*(share price) per day, even if the lending rate were to remain that high and fixed, which it won't. Commented Apr 30 at 19:29
  • The borrow fee is high since no one is lending it and / or there is a high demand for borrowing. The lender does not get 500%. A percent of that goes to the brokerage's reserves. They'd still get something like 250% for lending. You'd have to check with the brokerage for the formula used for the supply and borrow side rates.
    – ZeroPhase
    Commented May 3 at 6:04
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Imagine I have 100 shares, worth $100 each. You think the share price will drop, that's why you want to borrow the shares from me, sell them for $10,000, buy them back for $2,000 when the price drops to $20 per share, and return them to me.

But I also believe the shares will drop. So if I charged you $1 to borrow each share, I'd get $100 now, and some time later you give me back shares worth only $2,000. That's an awfully bad deal for me. I would much prefer to either sell the shares for $100 right now and get my $10,000, or lend you the shares for $80 per share, so I get $8,000 now, and $2,000 later when you return the share.

But the obvious fact is that if you think you can short 100 shares currently traded at $100, sell them for $100 each and buy them back for $20, making $8,000 in profit, then whoever makes this possible will want a very significant part of those $8,000.

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    Bob, reading comprehension. I gave an example fee of $1, explained why that would be an awfully bad deal for me which is why i doesn't happen, and with these numbers a $80 fee per share would be realistic.
    – gnasher729
    Commented Apr 30 at 7:41
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    Your concept of the share lender receiving $100 is incorrect. At 500% interest, you'd receive $200 per day. Your second paragraph is totally wrong. When you lend your shares, you get nothing other than the borrow fee. You do not get $8,000 ($80 per share). If the borrower returns the shares when they are $20, you have lost $8k less whatever borrow fees you received while your shares were loaned out. And if we're going to be technically correct, the lender splits the borrow fee with the broker, so you'd get far less than $200 per day. Commented Apr 30 at 10:38
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    You do not understand the mechanics of shorting shares. Commented Apr 30 at 10:39
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    The lender does not receive 500%. That's the borrow side APY. The supplier of the asset receives a far lower, but still high, interest rate. A portion of that interest goes to the brokerage firm. Part of it gets added to their reserves, another portion is taken as profit, so what's left goes to the suppliers of the asset. There are also additional fees paid up front for locating the shares in the first place.
    – ZeroPhase
    Commented May 3 at 10:18

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