Concentrated Single-Asset Postions: Short against the box?????

CFA Level III Portfolio Management
#1

So I’m a little confused about how this is a cheap option. The text says that the interest earned on the net position would help pay off the margin interest, but i have no idea where this interest on the net position is coming from… Any dividends would be netted out (e.g. Long a stock with a $2 dividend, Short the same stock-> the $2 from the long would pay the $2 owed to the owner of the shares sold short)… what am I missing here?

#2

When you sell the stock short you have cash which you can invest. If you leave it in your brokerage account, you’ll earn the risk-free rate.

#3

Thanks for the response! So you would not be using the proceeds of the short sale to diversify, you would instead take out an external loan against the boxed position and the cash from the short would stay in the account earning the risk-free return. So my thinking is if I have a $1,000,000 long position in XYZ stock which I box by going short the $1,000,000 of the same stock and as a result I have $1,000,000 in cash that has to sit in the brokerage account due to the short position earning the risk free return of 5%. I then take out a loan at $1,000,000, assuming I could get a 100% LTV, at 7% and as a result have a loan with a net interest rate of 2% and no risk on the concentrated stock. Is my thinking correct?

#4

Then why do this stretegy for stock XYZ? you are borrowing and shorting the stock which has nothing to do with your original long pisition, is it? You can boorw and short ABC.

The whole concept about short sale against the box is very confusing for me.

#5

I think so. Proceeds form selling borrowed stock earn interes in borokerage account and you take another loan collaterized by your initial concentrated asset that is used to diversify portfolio.

#6

Anybody could verify this?

#7

"Then why do this stretegy for stock XYZ? you are borrowing and shorting the stock which has nothing to do with your original long pisition, is it? You can boorw and short ABC.

The whole concept about short sale against the box is very confusing for me."

borrowing and shorting together with ur initial long position would CREATE the riskless position for dealers to offer ultra high ltv

borrowing against long position may not get hltv - risky asset + would not earn the risk free rate; similarly establishing a pure short position also has the same set back.