Case Study: $24,000 Gain Overnight
When the stock ticker is that of the initials of an ex-US President, DJT, buy. This trader made $24,000 overnight:
Schwab has the borrowing rate to short DJT at 184%.
Per ChatGPT’s explanation:
The borrow rate for shorting stocks can vary for several reasons, particularly for hot stocks that many people want to short:
Supply and Demand: Just like any other market, the cost to borrow stocks is driven by supply and demand. If a stock is very popular to short (high demand) but there are only limited shares available to borrow (low supply), the borrow rate will be higher. This is often the case with "hot" stocks that many traders are betting against.
Risk: Lenders assess the risk involved in lending out their shares. If a stock is highly volatile or has a high chance of increasing in price (which would result in losses for short sellers), lenders may demand a higher fee as compensation for that risk.
Short Interest: If a large percentage of a stock's available shares are already sold short (known as high short interest), it indicates that many people are betting against the stock. This can make it harder to find available shares to short, driving up the borrow rate.
Regulatory Requirements and Costs: Financial institutions that lend out shares might have to meet certain regulatory requirements, which can increase their costs. These costs can get passed on to the borrowers in the form of higher rates.
Stock Loan Rebates and Collateral: The mechanics of lending stocks involve collateral and rebates. The specifics of these financial arrangements can also influence the overall cost to borrowers, thus affecting the borrow rate.
Understanding these factors can help explain why borrow rates vary, especially for stocks that are in high demand for short selling. It’s a dynamic situation influenced by multiple factors related to market conditions and individual stock characteristics.
Readers here who are also DIY Full Group subscribers got a chat post about how DJT will play out: