Thread by @kevinmuir

Beyond Meat Call/Put Parity Lesson

$BYND has been running like it stole something since coming public at $25 a few months back. Since then it has exploded to $235 ripping a lot of shorts' faces off.

1/ of 15

In the process, the borrow rate on shorting has soared. Right now it is clocking in at over 100%. That means for a short seller to make money they are facing a huge negative carry. At 100% that means the stock must decline by $0.64 everyday to BREAKEVEN.

2/ of 15

So a lot of traders say, "I will avoid the short fee by trading options."

Really? You think the markets are that inefficient? If it was that simple to avoid the soaring short fee, everyone would do it.

Let's walk through why there is no free lunch...

3/ of 15

Let's start with a regular stock with little borrow fee. The SPY ETF is approximately the same price, so it's a good one to compare.

We will use the 09/20/19 option which is 56 days from Friday's close.

Here is the bid/offer on the SPY, and the 302 Call and Put.

4/ of 15

The pricing of the SPY call and put seems to make sense, but let's look at the BYND ATM call and put for the same month and see what it looks like.

You will notice the Put is $32 more expensive than the call.

5/ of 15

At first you might say that's because there is so much more demand for puts. Well, let's not forget that you can make a put by buying a CALL and SHORTING the stock. That's what's called put call parity.

Imagine a world with no borrow, no interest and no short fee.

6/ of 15

In that world, if I said you could BUY an ATM put for $5 or you could BUY the same term ATM Call and short the underlying, then you would be indifferent to either position.

Now this only works perfectly in European options (that which cannot be exercised early)...

7/ of 15

but in reality, the put/call parity is pretty close on American style options as well. Here is an article explaining it.

investopedia.com/terms/p/putcal…

Important thing to realize that the BYND puts are not higher because of demand, but because of the short fee on the stock

8/ of 15

Let's imagine that you could borrow BYND for nothing because your neighbour was the CEO and willing to do you a solid - lending you stock for your fledgling stock option arbitrage operation.

How could you profit on this?

9/ of 15

Well, assuming no borrow fee, you could immediately do the following trades (assume mid-mkt execution)

SHORT BYND @ 234.90
BUY Sep 235C @ 23.50
SHORT Sep 235P @ 55.50

What would happen after 56 days?

10/ of 15

First of all, you would get $0.55 of interest on your short sale proceeds of the stock.

Then you would either exercise your call or be longed the stock on your short put position.

Either way, you would cover short at $235.

11/ of 15

Let's review the P&L...

Lose $0.10 on shorting at 234.90 buying at $235. Make $0.55 of interest and then have a $32 credit on the put and call trades.

So you would make $32.45 on your positions NO MATTER WHAT HAPPENED TO BYND.

12/ of 15

But of course you can't borrow BYND at zero. You need to pay more than 100%. And that's what when you look at the option chain, the Implied Vols on the calls are roughly the same as the Implied Vols on the puts.

There is no free lunch...

13/ of 15

The borrow fee is built into the option pricing. There is an implicit borrow rate implied into the price of these options over the life of the option.

Hope this helps explain why BYND options do not offer a way to avoid the high borrow fee.

14/ of 15

These are the sorts of things my buddy @PatrickCeresna discuss each week on our show @TheMarketHuddle.

Yeah, we're screwballs that drink beer while we do it, but we try to make it helpful in explaining topics like this.

markethuddle.com

Thanks for reading....

15/ of 15