I’m writing this post ahead of time and putting it in the vault. Er, rather, the time stamp, so it will pop up on Expiration morning.
When I went to “press” (or if you prefer, went to sleep) there were rumblings the SEC was going to ban short sales. I assume new short sales. But for all I know all stock shorters were rounded up overnight and sent to some holding station in Belarus, while all long sellers will now be forced to fill out a full W-2 form for each sale, as well as one page, single-spaced written essay explaining why exactly you would like to sell your stock. Approval should come in the snail mail within 6 weeks of when the government receives your paper work.
News or not though, remember that SPX options expire on the opening print today. Opening print being a calculated price based on where each SPX component opens. So for anyone who has expiring SPX positions, VERY tricky to hedge. Basically if you’re short and the SPX moves against you pre-market, you’re chasing. Gamma is effectively 100 on every option as it gets near the money, so it’s the perfect time to announce some sort of new Gov’t action to get maximal impact.
And while we’re at it, how about a quick primer on Ways Someone Big And Evil Enough to Go Short Enough Stock That He Can Cause His Own Meltdown Can Still Make Bearish Bets Without Ever Shorting a Share. Prices may vary. We’ll soon see how exactly this new rule will impact everything.
He can buy puts.
He can buy puts and short calls.
He can buy puts and short calls on the exact same strike and expiration and have virtually the exact same position as if he shorted stock.
He can buy DEEEEEEEP puts and stock, and then bang out his long stock.
He can short an ETF like the XLF and then buy the stocks in the basket he doesn’t want to be short.
Want to ban shorting ETF’s too? He can buy the SKF and get double the fun and again, buy the component stocks he doesn’t want to be short.
He can short Single Stock Futures (hat tip Don Fishback).
I could go on. Chime in if you have more.
Notice none of these things need a plus tick either.
In other words, you and I will get inconvenienced by each and every new impediment they put up, but nothing short of dumping Short Players in water and seeing if they can float (credit to Paul Kedrosky on that one) will ultimately stop them from making bearish bets.
As if that’s a desirable goal to begin with.
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“When placing trades today (September 19, 2008) to open a September uncovered long put or short call on any of the 799 equities restricted from being sold short by the SEC’s emergency order, please be aware that it is your responsibility to close uncovered short positions on September expiration options by 4:00PM EST today (September 19, 2008). Orders are subject to review. You are responsible for any financial impact in complying with this emergency order.”
– according to Schwab’s retail site.
As I read the SEC emergency order, it looks like you’re allowed to get short by letting a pre-existing September long put position (or uncovered short call) be exercised over the weekend, but *not* if you established the option position today.
October options expire after the October 2nd deadline, so they should trade like European options between now and the 2nd. Assuming the SEC doesn’t extend the emergency ban on shorting past October 17th, the October cycle should end relatively normally. Institutions are probably working out arb strategies for the transition from European-style exercise to American-style exercise at or around October 2nd.
Meantime, the stock (as opposed to index) options market makers are going to make a fortune on wide spreads.
Insanity.
I oughta buy one contract of deeply-in-the-money calls today, just for spite.
edit: As in “one contract of deeply-in-the-money SKF calls, just for spite.”
yeah really, I’m thinking someone’s going to get a perp walk for exercising some puts.
LOL… well, the clients won’t, but the broker might get a nasty letter depending on the aggregate activity of its clients.
Presumably the broker’s option desk takes client calls (contrary exercise, etc) up until the client cutoff time. It then has another hour or so to net out its clients’ activities in each security before submitting one aggregate order to OCC/DTC and the rest of the settlement food chain. If the firm’s clients end up exercising 1000 XYZ calls and 1200 XYZ puts, then the OCC asks the broker to deliver 20K of XYZ to DTC.
Something similar probably happens when the OCC runs through the assignment process. (Or OCC nets it out first, and the broker is only required to come up with 20K shares +/- however much XYZ was assigned.)
Either way it settles, but if the broker can’t borrow 20K of XYZ (+/- assignments), it’s the broker that gets the nasty letter.
Been a while since I’ve thought about the mechanics of the clearing/settlement process, and I probably got most of it wrong. Have to ask around over the weekend after the dust settles…
yeah, but somehow they customer will get arrested.
Can anyone comment on the effects of the latest SEC amended short sale rule that was released Sunday? http://sec.gov/rules/other/2008/34-58611.pdf
IT sounds like MM’s will be able to short stock, under some sort of restriction. MM’s in ETF’s also (note though the 3rd party hedger in the SKF is something altogether different).
Important to note though, customers can’t exercise puts that get them short, or sell calls that are not covered. So MM’s can now trade, but won’t actually have customers.
Adam, Thanks. I guess it’s just bizarro world.
Completely.