10.09.17 - Bob's Free Lunch: Lobster is on the Menu Today

Our newest blog post looks at the pre-earnings divergence in a stock’s short-interest measures vs. the Hanweck Implied Borrow Indicator, which forecasts whether a stock is becoming harder or easier to borrow using data from the options market [1]. Stock borrow rates offer value as a trading and risk indicator. It can be an important signal, if a stock not ordinarily hard-to-borrow suddenly becomes hard-to-borrow, or if the opposite occurs.

If a stock with a large short base pre-earnings (indicating negative market expectations) is actually becoming easier to borrow according to our data, this could be a signal that market expectations are incorrect and could present an opportunity for alpha generation.

Why call it Bob’s Free Lunch, you ask? Hanweck’s Head of Business Development Bob Levy did exactly this a few weeks ago. He was sitting with one of our quantitative analysts reviewing the list of stocks most-shorted before earnings and compared it to our Implied Borrow data.

One name stood out as inconsistent: IMMU (IMMU: 11.17 -0.01 (-0.09%)). Options markets showed it becoming easier to borrow, with no premium at all for Puts over Calls as we approached earnings day, but the most-shorted pre-earnings list showed it to have an increasing % of shares outstanding on loan, and a top-10 levels of securities borrow by same measure. So a major short-base by conventional measures with not a smidgen of informed Put buying in options in Implied Borrow.

Figure 1: IMMU Implied Borrow Indicators

So Bob went ahead and bought 100 shares of IMMU before earnings at $7.89. It's now trading above $12 and paid for Bob to enjoy some fine dining. Here’s Bob at lunch:

Market participants frequently look at standard indicators such as Loan Outstanding and the delayed Short Interest indicators. By also using Hanweck Implied Borrow data, they now have access to a true here-and-now measure of expectations of the same thing. It's all about inspecting the iceberg from both above and below the water.

[1] Hanweck Implied Borrow Indicators offer advantages as a window of insight into the Stock Loan market:

●     Based on transparent listed equity option markets

●     Available in real-time

●     Visibility into term borrow expectations (e.g., 3 or 6 months) that can reveal market dislocations

Interested in Learning More?

Schedule an online demo with Bob below.