Live Arbitrage Opportunity - Puzzle

[Brodie]

Didn't know where else to put this but I need a sense check on this significant arbitrage.

NKLA Box spread nets $45 today.
-Sell 7/17/2020 60P
-Buy 7/17/2020 60C
-Buy 7/17/2020 30P
-Sell 7/17/2020 30C

On 7/17/2020 it will cost $30 for any terminal stock price.

Relevant info:
-The implied volatility on the puts are about 3-4x higher than the calls (400% implied vol on puts, ~100-150% implied vol on calls)
-Short calls at K=30 that are exercised can be re-established next morning for a cost of about $0.05 (even if this happens everyday for 25 trading days this is only about $1.25 in rebalancing losses)
-Shares are hard to borrow and have very high borrowing cost (which still doesn't explain this amount of premium)
-20-30mm warrants are outstanding that can be converted to shares (much like a call option with a strike at $11.50)

Can anyone here help me solve this puzzle?

 

[QuantQuestion]

What's the commission to execute each leg? Also isn't there exercise risk on the short position that could hurt it's profitability?

 

[quanttrader]

I'm pretty confused here as well, as the 60 strike call should be more expensive than the put given that NKLA is trading ~62... that's an arb in itself -- if you buy the call and sell the put to collect net premium of $18.85 and sell short 1 share of NKLA stock at 62, you're perfectly hedged and make a riskless profit, but of course you mentioned the NKLA shares are hard to borrow. Still, it seems like there's an error.

 

[ApolloChariot]

They're American options, not European, and can be exercised early. You would be shorting the higher strike put, and shorting the lower strike call.

Let's say you write the 30 strike call, and you get assigned. What would you do? You can exercise the 60 strike call, lock in the loss of 30 dollars per share, and then continue to have exposure to the short put spread. Alternatively, you can try to short shares, but shorting presents its own problems. There are likely sky high borrowing costs and the broker can terminate your short position at any moment. The stock can be halted for a period of weeks or months, and the nightmare scenario would be that you would be short shares, be stuck paying outrageous shorting fees with no way to close the position.

For more details, check out the dangers of box spreads in this article:

Trader says he has ‘no money at risk,’ then promptly loses almost 2,000%

Every trader has a bad run, sure. It’s just the nature of the business. But a 2,000% loss on a single options play that ultimately leads a broker to tweak...

www.marketwatch.com

 

[throll]

is it so rare for people to exercise American option that they ultimately think it will never happen?!