GM has proposed a restructuring plan that (a) will not be accepted by bondholders; (b) will make the company literally government-owned; and (c) will dilute existing shareholders by at least 100x.
Naturally, the stock popped 20% on this news. So just for fun, I decided to short it with a small position.
Except that did not work, because GM is so heavily shorted already that there are no shares available to borrow. Since I think I am so clever, I decided to try a synthetic short instead. A “synthetic short” means selling a call option and buying a put option with identical strikes and expirations; the return of such a combination is identical to shorting the stock. For example, I could use the September $3 call and the September $3 put. As I write, these trade for $0.25 and $2.38, respectively… Which would allow me to go short the synthetic stock at an effective price of $3 – $2.38 + $0.25 = $0.87.
Now that is a little strange, since the actual stock is trading above $2. If you know anybody who believes in efficient markets, show them this example and see what they say. Two instruments with literally identical underlying value are trading at prices that differ by a factor of 2.5. The only way to arbitrage the difference is to buy a synthetic long and short the stock… But as I mentioned, the latter is not currently possible, which is why this anomaly can persist.
However, if you know anybody who is holding GM stock because they are praying for a miracle or whatever, you might suggest they sell the stock and buy a synthetic long position instead. From their point of view, that is free money.
Personally, I believe our markets have become a heavily manipulated nightmare where 99% of the volume consists of computers trading with each other based on purely technical factors. As evidence, look no further than GM.
After doing some more thinking and reading — something similar is happening with Citigroup, for instance — I see there is an economic difference between owning the actual stock and owning synthetic stock via options: If you own the actual stock, you can loan it out right now for a ridiculous rate of interest to people who seek to short it. You cannot similarly loan out synthetic stock, and this accounts for the price differential.
Put another way, the stock price is being amplified by a factor of 2.5 because so many people are willing to pay a premium to short it. Welcome to wonderland, Alice.