Beware of the Interest Trap
Shares to short were scarce, so even my gigantic broker could only find them if I was willing to pay 2% in annual interest to borrow them.
I agreed, not asking if that number could change. A couple of days after initiating my collar, feeling good about my brilliant move, my broker called to inform me that the cost of borrowing the shares had just gone up …. to 70%!
Not only that, but it could go even higher without warning.
There was no way I was going to pay 11% interest — another $920 — until my December collar played out. What a crushing blow.
I had no choice. Even worse, the stock was trading at $19. So I covered the short for a $1,125 loss … but then had to buy back the puts for a $420 loss and sell the calls for a $400 loss. Total donkey-kick-to-the-head loss was $1,945.
The lessons here have already been explicated. The only consolation was that I’d already made over $10,000 this year selling naked puts on certain stocks — a much better strategy, which I’ll talk about next time.
Lawrence Meyers is crushed to report that he no any longer has any positions in EDMC. Wah-wah-wah.