Monday, May 06, 2019 9:29:10 PM
Shorting Without Failing to Deliver
There is another form of short selling, which I describe as synthetic short selling. This involves selling calls and/or buying puts. Selling calls makes you have negative deltas (a negative stock equivalent position) and so does buying puts. Neither of these positions requires borrowing stock or "failing to deliver" stock.
A collar is nothing more than a simultaneous sale of an out-of-the-money call and a purchase of an out-of-the-money put with the same expiration date. Another way to short sell is to sell a single stock future, which is equivalent to naked short selling. No shares are borrowed, however, and no shares are failed to deliver.
Prepaid forwards and swaps are sometimes used to carry out short sales. However, these are done directly between the customer and some bank or insurance company, many of which have become suspect in terms of their ability to guarantee the counterside. (See also: An Introduction to Swaps.)
Holding any one of the above positions alone or in combination with another essentially gives you a negative delta position whereby you will profit if the stock goes down.
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