Often different stocks that I want to short are not on my broker's "easy-to-borrow" list, so they are unavailable for shorting.
A couple weeks ago I got serious about option trading and I found out about the "short combo". This is when you write a call and buy a put at the same strike price. The net result is a payoff very similar to being short the underlying stock.
Depending on the strike price that you choose, it's possible to enter this position at a net credit (due to the premium for writing the call being greater than the cost of the put).
The thing I can't get my head around is why this should be so.
For instance, right now I can enter a short combo against Barnes and Noble (BKS) for a credit of 1145 USD if I choose the strike price of 10. However, the credit is only 240 USD if I use the strike of 20. The underlying traded at 21.54 at today's close.
Since the payoffs are the same, why do I get a larger credit with the further ITM strike? I've looked at it in some option graphing software, and I suspect that the answer has something to do with the relatively higher extrinsic value of the combo at the 10 strike.
A more intuitive explanation would be appreciated!
If I am trying to create a synthetic short against a hard-to-borrow stock, I assume I should use the strike closest to the underlying price. Is this the case? If not, how do you select the right strike given this goal?