Reducing the Carry Cost of a Long-Term Equity Short with Options

Summary

The post considers how to maintain a bearish view on Tesla while limiting the ongoing expense of a stock borrow over a potentially long holding period. The response explains that derivative prices generally reflect the costs associated with carrying the underlying short exposure, so options do not automatically provide a cheaper way to obtain the same payoff. A trading or execution advantage could change that comparison.

It offers two ways to alter the exposure: buy puts while selling lower-strike puts to offset some premium, or give up part of the potential payoff in exchange for a lower-cost position. These approaches change the payoff relative to a naked short and do not preserve all of its upside or risk characteristics. The post gives no option prices, payoff calculations, or evidence that either structure will be cheaper in a particular market; suitability depends on the desired exposure and prevailing pricing.

Key ideas

• Derivative prices generally incorporate the costs of carrying short exposure.
• A put spread can offset some of the premium for bearish exposure.
• Capping part of a position’s potential payoff may reduce its cost.
• Option structures change the payoff and do not replicate a naked short exactly.

Tags

# Efficient way to short Tesla


# Efficient way to short Tesla












I believe that at 45B$ Tesla is massively overpriced. The thing is that I don't know how long it will take it to trade on fundamentals, maybe a couple of years after launching model 3.

So I want to short it, but not to suffer from the excessive cost of holding a short position for many years.

What do you suggest is a good way to implement such a short?

Thank you

## Answer by elleciel (score 2, accepted)

https://quant.stackexchange.com/a/32447

As LocalVolatility pointed out, the cost should be priced into the derivatives as well so you cannot do better than that unless you have an execution alpha, provided you want the exposure of a naked short.

You can offset some of the cost of your short position with option premium, e.g. a vertical spread where you buy 1 or more puts at higher strike price(s) and offset their costs by selling put(s) at lower strike price(s).

However, if you just want to take a short position but don't necessarily want the complete upside of a naked short, you can construct a position that gives up something of equivalent value, e.g. capping your upside in exchange for lower cost.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.