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Why Expensive Calls Do Not Have a Stock-Borrow Equivalent

Article Quant Q&A · Author: user151781
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Summary

The document asks what happens when traders expect a stock to rise sharply and calls become expensive relative to puts. It compares this situation with hard-to-borrow stocks, where borrow fees can explain why puts trade rich relative to calls and limit apparent arbitrage. It then speculates that unusually strong buying pressure, such as a commitment to support the share price or aggressive buybacks, might push the stock upward until the pricing gap closes.

The discussion raises a useful options-pricing question but does not provide an answer, a model, or market evidence. It leaves open whether call richness represents an arbitrage opportunity and how financing, dividends, exercise terms, and trading constraints could affect the comparison. The suggested price-support scenarios are posed as possibilities rather than established explanations, so the document is best read as a question for further investigation.

Key ideas

  • Hard-to-borrow fees can affect relative put and call prices.
  • The document asks whether unusually expensive calls have an equivalent to stock-borrow costs.
  • It proposes strong buying or buybacks as possible forces that could close a pricing gap.
  • The discussion does not establish that call richness creates a risk-free arbitrage.

Tags

OptionsEquitiesArbitrageDerivatives pricing
Full text
# Opposite of hard to borrow?


# Opposite of hard to borrow?












If market participants are certain a stock will suffer a huge decline, the shares will become hard to borrow and an interest fee will be applied to borrow the stock. This interest fee eliminates the arbitrage opportunity from having ATM puts being more expensive than calls. In The context of options pricing, what happens when you have an opposite situation when everyone expects the stock to rise? If calls become more expensive than puts then you have arbitrage, and there is no such thing as 'hard to buy' . I imagine what happens is the stock would suddenly spike higher until the easy money is made. Like what would happen if a billionaire pledged to keep the stock above a certain price level or if the company underwent extremely aggressive buybacks?

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