i own a decent amount of tesla stock and 2016 was a great year for lending it out.
since tesla is such a controversial company, lots of people want to own the stock (expecting it to go up) and lots of people want to short sell it (expecting it go down).
if you're a stock holder, certain places (like interactive brokers) will let you lend your stock holdings to people that want to sell it short. you earn a premium on this loan, but its basically risk-free since the brokerage bears the counter-party risk.
because short interest is so high, there was a substantial portion of 2016 where there weren't enough shares available to satisfy short sellers' demand. TSLA became classified as "hard to borrow" and borrowing premiums would be anywhere from 8% to 100+% depending on the day/demand. this is money short sellers pay on top of the cost to purchase the shares (and one more thing to bear on top of the risk of short-selling, but that's another story).
the premium is paid daily, and the brokerage usually takes a chunk of it (often half), so if you had $100k of tesla stock and the premium was 50%, you'd earn (100,000 * 50% * (1/2) / 365) = $68.50 for each day that someone borrowed your shares. the rate fluctuated daily, but this still netted me several thousand dollars of truly passive income, since i was planning to hold the stock either way. this is also a huge income stream for institutional shareholders that are sitting on millions of shares.
What would be a good starting place to learn more about doing this? Also, is it possible to do with a small amount of shares in individual companies if the bulk of my investments are in indexes?
If you were set on doing it, you could compare this list of heavily shorted companies (http://online.wsj.com/mdc/public/page/2_3062-nasdaqshort-hig...) with the rates paid by your broker. if you're using Interactive Brokers, this is listed under "SLB (Stock Loan/Borrow) Rates".
If you own index ETFs then you can loan out those shares. QQQ is on that list and it's a NASDAQ index ETF. If you primarily own indexes though then you don't really own shares in the individual companies comprising that index, so I don't think you have something to loan technically. Like you might sort of own a lot of Apple through an S&P index, but you can't really deliver shares of Apple to a short seller.
Two columns to note in the link above:
* if you look at the "% Float" column in the link above, you can see that TSLA is at 32.0%, meaning that 32% of all TSLA stock is held by people that are shorting it. this calculation is a little more nuanced than this because shorts are only borrowing it and the stock kind of has two owners, but it paints the general picture: 1/3 of Tesla stock holders are there because they hope Tesla stock decreases in value. I think they're dead wrong but that's how markets are made.
* the "days to cover" column means that if all the short sellers tried to close their position (ie, buy stock in the company), how many days would it take that to happen at an average day's volume? this can be an indicator of companies ripe for a short squeeze, where a company announces unexpected good news and shorts rapidly try to close their position but not enough people want to sell and so the stock price skyrockets. This famously happened to Volkswagen: https://www.quora.com/What-are-some-of-the-greatest-short-sq...
be aware of a few things in general:
* these rates are completely out of your hands. GOGO of Gogo inflight Wifi is listed at 43% float and 21 days to cover, but its borrow rates are around 8%. I don't know why.
* in many cases, there is a short argument worth listening to and there's a reason many people are shorting a stock. GoPro/GPRO is currently paying 86% for people to lend out their shares to short sellers. You could buy GoPro and lend out your shares but then you run the risk of owning GoPro and it's a big question mark how big that risk is. I face that same risk in owning Tesla, but I think the short argument is garbage and I really believe in the company and that's enough for me.
* the tesla situation was kind of a perfect storm because it has a lot of fervent believers on both sides. companies that people are really passionate about might be hard to come by.
also, as a side anecdote about short squeezes: people were really expecting one these past few months with Tesla regarding its SolarCity merger. The thought was that since there was a potential merger coming up, shareholders were going to need to vote on it one way or the other. That meant that Tesla's institutional shareholders were going to have to recall their loaned shares from short sellers because if the stock were loaned out at the vote record date then the institution technically didn't own it and wouldn't be able to vote on the merger. Since Tesla has such a large percentage of institutional ownership this would trigger a short squeeze.
For whatever reason this never materialized but I don't know why. There's a possibility it may have been against SEC rules or that institutions gradually recalled their shares so as not to disturb things too much.
That's true. The only point I would add is that my loan is with the brokerage and they put up cash collateral. I'm not having to deal with individual short sellers and whatever risk profile they might have.
i don't really know of any aside from the brokerage itself going under.
i would imagine brokerages want to make this as low risk as possible as it encourages more transactions, so they can charge more fees. and they also get their cut of the premium.
How do you set this up in IB? I have a decent amount of long positions that this seems really useful on (especially since they will be selling float regardless)
The only ones I know of off the top of my head are Fidelity and Interactive Brokers. Maybe Schwab as well? I think in general Fidelity and IB have similar rates.
since tesla is such a controversial company, lots of people want to own the stock (expecting it to go up) and lots of people want to short sell it (expecting it go down).
if you're a stock holder, certain places (like interactive brokers) will let you lend your stock holdings to people that want to sell it short. you earn a premium on this loan, but its basically risk-free since the brokerage bears the counter-party risk.
because short interest is so high, there was a substantial portion of 2016 where there weren't enough shares available to satisfy short sellers' demand. TSLA became classified as "hard to borrow" and borrowing premiums would be anywhere from 8% to 100+% depending on the day/demand. this is money short sellers pay on top of the cost to purchase the shares (and one more thing to bear on top of the risk of short-selling, but that's another story).
the premium is paid daily, and the brokerage usually takes a chunk of it (often half), so if you had $100k of tesla stock and the premium was 50%, you'd earn (100,000 * 50% * (1/2) / 365) = $68.50 for each day that someone borrowed your shares. the rate fluctuated daily, but this still netted me several thousand dollars of truly passive income, since i was planning to hold the stock either way. this is also a huge income stream for institutional shareholders that are sitting on millions of shares.