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How To Make Passive Income with Fully Paid Lending (FPL) Programs

There are a ton of different strategies to match your personality when investing.  There’s day-trading, momentum investing, dividend hunting, and options trading. One tactic that hasn’t had much written about in the how-to press, however, is taking advantage of FPL programs.

What is Fully Paid Lending?

FPL (Fully Paid Lending) is a program that some brokerages offer (eg: ETRADE, Fidelity and Tradestation) that allow you to lend out stocks you own and the brokerage will split the borrowing fee with you. It’s kind of like being a landlord, except that the property you’re renting is a stock instead of a residential one.

And, in this analogy, who are your tenants?  Mostly options traders — that is, traders who are swapping contracts predicting the future price of the stock you own.  But regardless of whether they are short or long on your stock, you always get your commission.  It’s a taste of the experience of being a brokerage firm — you collect your borrowing fee whether the bet is short or to long, whether the stock price goes up or down.

According to Investopedia:

A stock loan fee, or borrow fee, is a fee charged by a brokerage firm to a client for borrowing shares. A stock loan fee is charged pursuant to a Securities Lending Agreement that must be completed before the stock is borrowed by a client (such as a hedge fund or retail investor).

This FPL strategy is particularly effective for small cap stocks with high borrowing fees. There are certain stocks considered “hard to borrow.”  These stocks are typically either small caps, with relatively few outstanding shares, or very volatile stocks that are shorted often. According to Investopedia:

Brokerages have a variety of ways to provide access to shares that can be [optioned], but regardless of their methods, the result is a finite number of shares available. Once the number of shares available has come close to running out, the broker will publish a notation of some kind on their platform. This alerts account holders that if they attempt to sell that security short, their trade order may be refused.

The fees associated with these hard to borrow fees can be quite high. In fact, a group of traders actually sued ETRADE in 2019 for what they considered to be unjustifiably large borrowing fees that weren’t disclosed properly.  These huge fees would be bad news for a short-seller trying to maximize his margins. For someone lending out stock via FPL, however, the high borrowing fees are great, as you pocket 50% of them, splitting them with your firm.

How do you know that you’ll get the stock back that you’ve lent out?

Part of FPL, is your broker gives you the collateral value of your stock every single day that it’s loaned out. You can sell the stock or opt out of the program at any time.  If the stock can’t be returned for some reason, you get the equivalent cash value of the position you held on the last day, in exchange.

What are the earnings like?

Well, it depends on the number of shares you own, the borrowing fee, and the duration that you’re lending.  All accounts indicate that you can earn orders of magnitude more doing this  than you can holding dividend stocks and waiting for dividend payments.

And the risks?

Investing in small cap stocks is certainly riskier than investing in large-capped, well established mega-companies.  So you probably shouldn’t participate in FPL for any stocks that you wouldn’t choose to own anyway. Try to find stocks with good fundamentals, even with the caveat that they may be a small-cap stock.

It’s a very unusual position to be hunting for stocks that are going wild in options markets.  In a way, using FPL as a strategy is like shorting short-sellers themselves — you’re effectively betting that the short-selling community is wrong — which is why you’ve chosen to own the stock (and collect commissions) that they are borrowing for the short term.  So, if you’re the contrarian’s contrarian, this might be the tactic for you.

 

*The author of this post is not a licensed broker or a financial adviser.  Please consult with your adviser or brokerage firm on the risks associated with FPL programs. Buying or selling securities carries risk at any time, in any market conditions.