Hi everyone,
I know this is an old thread but I found it while googling a question I had about this very subject. Let me give you an example of why I'd want to go long and short on the same stock.
First, let's assume you have two totally separate IB accounts, in different company names, so they are not connected, but you as an operator of a parent company control both accounts. Let's say there's $1m in each account, so $2m total portfolio.
You then, using portfolio margin, go long on ORC with the full $1m in one account, with say 5x leverage. ORC is an MREIT that's currently paying over 14% dividend. 5x leverage would mean a $5m position with roughly $700k in annual dividends. Then subtract the interest charge for the leverage, which is roughly 80k for the year (~2% of $4m). That leaves you with $620k profit on $1m invested.
Then, on your other portfolio margin account, do the inverse -- 5x leverage on ORC short. This fully hedges the first position. You're also borrowing another $4m with an annual interest cost of $80k.
BUT you're reaping massive double-digit dividends with ZERO risk. Am I wrong?
The totals would look as follows:
$2,000,000 portfolio
$700,000 dividends
-$160,000 expenses
=$540,000 profit
$540,000/$2,000,000 = 27% Yield with ZERO risk!
The question is, is this legal, and perhaps more importantly, possible?