Asked to lend TSLA shares for shorting

[dauger]

My brokerage firm asked me writing last week to borrow my shares of TSLA, being "high-demand securities", and get paid interest on that loan. See attached (redacted). I have other stocks and was never asked about those.

It made me think. I'm long TSLA starting at $35/sh, and intend to hold for years to come.

Pros of lending: I'd make some money off those who foolishly short TSLA. Further I would have the right to demand the shares back any time, so I could choose a time that would hurt the shorts the most. That would be satisfying.

Cons of lending: I'd be an enabler of a short-seller's bad habit, perhaps encouraging more to short. By not lending, short-sellers have a harder time (pay more) finding TSLA shares to short.

What do you think? Would you lend your TSLA shares or not?

 

[Eclectic]

Absolutely. I own stocks as an investment and anything that can increase return with minimal risk is free money.

Plus, if you really don't like short sellers, you can agree to lend your shares then sell your shares during a runup in the stock price, which will cause the person who went short against your loaned shares to have to cover.

 

[HankLloydRight]

Plus, if you really don't like short sellers, you can agree to lend your shares then sell your shares during a runup in the stock price, which will cause the person who went short against your loaned shares to have to cover.

But couldn't they just borrow some other shares to replace yours and not close out their position? Assuming other shares were available for shorting. The only time they'd have to close out if there were no more shares to borrow, right?

 

[Eclectic]

But couldn't they just borrow some other shares to replace yours and not close out their position? Assuming other shares were available for shorting. The only time they'd have to close out if there were no more shares to borrow, right?

It's been many years since I worked in the operations side of brokerage (like, over 20), but back then once an account was picked to cover a short, that was it. The short had to be covered. Of course, if shares become available after covering, the short position could be reopened, but by then the short seller will have likely suffered the financial loss from covering and may not have the appetite to try again.

 

[Drivin]

I could choose a time that would hurt the shorts the most. That would be satisfying.



What do you think?

Hurting people is so much fun and satisfying!

You should do this and use the proceeds to figure out why you get satisfaction out of hurting strangers.

 

[HankLloydRight]

It's been many years since I worked in the operations side of brokerage (like, over 20), but back then once an account was picked to cover a short, that was it. The short had to be covered. Of course, if shares become available after covering, the short position could be reopened, but by then the short seller will have likely suffered the financial loss from covering and may not have the appetite to try again.

Now that I think about it, (my head was a little wine foggy last night).. I don't know how it would actually work these days. I'm not a trader, but I have to imagine there's some internal mechanism to prevent a specific shareholder from calling in specific shares that are held by a specific short seller. But I really don't know now.

Also, I was curious how this formula worked out for anyone.

It's about $1.10 per month per share. So if you have 100 shares, you'd make $110 per month lending them out.

 

[dauger]

It's about $1.10 per month per share. So if you have 100 shares, you'd make $110 per month lending them out.
View attachment 187353

Yes, that's basically the proportion that Schwab calculated for me. I blanked out spots so one couldn't deduce how much I have. So this means $1320 a year per 100 sh; it's enough to make me think.

Actually your calculation suggests a utilitarian argument for periodically forcing the short seller to cover: Today the interest rate is based on ~$225/sh, but later it goes higher to say $250/sh, then I demand it back, then lend it again at $250/sh, my new interest payment is higher, based on $250/sh. Again at $275, etc. It seems each refresh is no cost to me, and with so much short interest out there a short seller would take the bait fast every time. If my shares are returned to me early, I don't really lose anything.

 

[Alketi]

My shares are in a margin account, which means they can be lent out freely, without rental income coming my way. )

Why wouldn't you lend them? In your case, it's free money to the tune of a 65" TV at the end of a year for each 100 share block. Plus, I don't know the exact statistics, but short-selling is done frequently by institutions/hedge funds. You're not encouraging innocent kids to misbehave.

 

[HankLloydRight]

But can you still screw over a short seller with this strategy or are there protections in place?

 

[Incredulocious]

This has been discussed in other threads actively, particularly over the past month with lending rates reaching over 10% for TSLA and 49% for SCTY. (It's been dropping a bit this week.) Just search the forum for "loaning shares" to find these discussions.

And yes, I'm loaning my shares. I even transferred all my SCTY and TSLA shares from brokerages which don't share the interest they earn by loaning your shares to those that do like Fidelity and Schwab. I'm certainly not concerned with any potential temporary impact by a few more individuals being able to short the stock, particularly when they're paying me so much to do so. I only wish I knew about this opportunity a long time ago.

However, if I really want to take the "maximize my benefit" route, I should suggest that you not loan out your shares, so that there remain that many fewer to loan out and the borrowing rate remains high.

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And you'll also find much discussion about "recalling" your shares and thus forcing short sellers to cover. In particular, there's been discussion about large institutional investors recalling their shares in order to vote with them in the coming expected TSLA/SCTY merger vote... and whether this might encourage a short squeeze.

 

[MikeC]

Yes, that's basically the proportion that Schwab calculated for me. I blanked out spots so one couldn't deduce how much I have. So this means $1320 a year per 100 sh; it's enough to make me think.

Actually your calculation suggests a utilitarian argument for periodically forcing the short seller to cover: Today the interest rate is based on ~$225/sh, but later it goes higher to say $250/sh, then I demand it back, then lend it again at $250/sh, my new interest payment is higher, based on $250/sh. Again at $275, etc. It seems each refresh is no cost to me, and with so much short interest out there a short seller would take the bait fast every time. If my shares are returned to me early, I don't really lose anything.

FYI the share price that the interest rate is based on is actually updated daily. So no need to recall your shares to lend them out again if the share price is higher.

 

[ohmman]

Your personal feelings about a company shouldn't have any bearing on your investment decisions. That's one reason that, despite being a Tesla enthusiast, I'm not a shareholder. There is a really wide market out there, so your investment choices should revolve around your best chances for appreciation within your risk threshold. Spite should play no part in your decision to loan shares. Loan them if the rates make sense.

 

[Yonki]

Why wouldn't you lend them? In your case, it's free money to the tune of a 65" TV at the end of a year for each 100 share block.

I'm loaning out my positions in TSLA and SCTY. But I know from experience that annualizing the returns is exciting but unreliable. On 4/13 TSLA was yielding an excellent 4.25% and SCTY was at 45%. But by 5/11 TSLA was down to 1.5% and SCTY 10.25%. Still respectable, but not nearly what it was at peak. On 5/25 TSLA was out of the program, 0%. But a month later TSLA was back at 0.5%, rising (and then falling a bit) to the 9.75% level it is today.

So while it's fun to make predictions (I can't help it myself - I have a spreadsheet that breaks the current rates into daily, weekly, monthly, and annual returns), the entire revenue stream can drop dramatically or even disappear over a few weeks or days. I would never expect rates to stay at this level for a year. Even several months is optimistic (though SCTY's been >10% for the 3-4 months I've been participating).

Though on the positive side, rates roughly go down as the stock price goes up (and shorts start covering) and up when the price goes down (and shorts pile on to make it go down faster). So it's a bit of a silver lining.

 

[neroden]

My brokerage firm asked me writing last week to borrow my shares of TSLA, being "high-demand securities", and get paid interest on that loan. See attached (redacted). I have other stocks and was never asked about those.

It made me think. I'm long TSLA starting at $35/sh, and intend to hold for years to come.

Pros of lending: I'd make some money off those who foolishly short TSLA. Further I would have the right to demand the shares back any time, so I could choose a time that would hurt the shorts the most. That would be satisfying.

Cons of lending: I'd be an enabler of a short-seller's bad habit, perhaps encouraging more to short. By not lending, short-sellers have a harder time (pay more) finding TSLA shares to short.

What do you think? Would you lend your TSLA shares or not?

I am already lending my shares. Schwab, where I have my shares, is offering a fairly poor deal compared to Fidelity and especially Interactive Brokers. Just so you know. You can currently get 9.75% at Fidelity. I'm being lazy by not setting up an account at another company, which I really should do, because losing 3.75% due to laziness is quite a loss.

 

[neroden]

I'm loaning out my positions in TSLA and SCTY. But I know from experience that annualizing the returns is exciting but unreliable.

...which is why I've mostly been fooling around with options instead. A synthetic long locks in your effective interest rate over the time period until options expiration (it has other downsides, admittedly).

 

[neroden]

Worth noting, you can recall your shares at any time.

When the vote is announced, there will be a "record date", the date when shareholders as-of-that-date get to vote. It is possible that they will announce a date in the past, but someone else at this forum gave a cogent explanation of why that was fairly unlikely. If they announce a record date in the future, you can recall your shares prior to the record date. I see no reason to recall my shares until we find out what the record date is, because I don't think it's very likely that they'll set a record date in the past. I might recall them prior to the vote, but I don't have to decide now.

 

[Chickenlittle]

How many days does it take to recall your shares before selling them. I thought it was three days notice at fidelity. How about other brokerages

 

[neroden]

I'm going to wildly guess that there's a sense in which it's three days pretty much everywhere, because that's the standard settlement period. You can demand your shares back at any time and you should be credited by the broker with having your shares back immediately, but the guy on the other side has three days to comply and actually deliver them.

 

[DaveT]

Does anybody know how the interest rates (for lending TSLA to shorts) offered by Fidelity, IB, Schwab and others differ?

 

[adiggs]

Fidelity recently changed the lending agreement to set the rate at which they borrow to 60% of what they charge to lend shares. Actually there's a little more to it than that, but I think it's going to come down to a simple 60%.

IB pays 50% of what they collect. I don't know about Schwab or others.

Today Fidelity has returned my shares - they apparently have enough shares of their own and in margin accounts to handle all of their lend-to-short's needs.