No Shares To Short

Shorting requires a holder shares to allow them to be lent (in exchange for a borrowing fee) to others. UVXY, along with other levered ETFs are commonly listed as ‘Hard to Borrow’ (HTB) with few, and sometimes none available for lend. Many brokers, such as TD Ameritrade, offer a Hard To Borrow program that gives traders access to short tickers that are listed as HTB instead of rejecting the order immediately.

So if you are wanting to short a HTB symbol, but none are available, what to do? Fortunately options can come to your rescue! By selling a naked Call option, and purchasing a Put options at the same strike price, a trader can replicate the risk/reward profile of shorting, without the need to locate available shares or pay any borrowing fees. A synthetic short using options will not be as efficient as shorting via actual shares, but will certainly get you past a “No shares available to short” limitation.

The biggest drawback to shorting synthetically is the reduced liquidity of options as compared to shares. I’ve often had to leg into these to get reasonable fills even with ATM strikes.

I’ve had many argue that there is no way to avoid the lending rate or borrowing costs to short a stock with options, that these costs are included/unavoidable when you put a short trade on. This contention fails to consider some pretty obvious facts:

  • Borrow rates fluctuate daily so there is no way to accurately reflect unknown future rates. This means both seller and buyer would either be short changed or or overcharged as the trade matures. Lending rate is also computed against the notional value of the position which might change greatly over time. Again, this would have to be set in stone from the outset according to those making this assertion.
  • The most glaring flaw in their argument; even if lending costs WERE included in the initial sale, a synthetic short includes both a sale AND a purchase. Any carry costs cancel each other out by default.
  • I demonstrated this with a live synthetic short of UVXY when spot was $4.74 and I opened a 4c/4p bear spread for $.78 (after commissions) That .04 difference is nowhere near what the carry cost would be for a 6 month hold, barely equal to the Rho input (since I collected capital on the trade) and would also assume that the market maker made $0 on the bid/ask spread