'Movieguy' pid='21786' datel Wrote:(A little nod to The Big Bang Theory on the title of this post.)
It was noted yesterday that a huge amount of calls were purchased yesterday, and that this might be a clever method for Shorts to cover as it does not push up the share price. Similar action has been noted on other days as well. If this is indeed the method that many of the big shorts are using to cover their positions, I was pondering what effect this would have on the likely short squeeze following a partnering announcement.
It would seem to me that if a short has completely balanced his short position with call options, he no longer needs to fear such a squeeze and could likely even make some money off of it. Would he not purchase shares to cover his short position, which will then cause the share price to continue to rise. This will increase the value of his options and he can then sell them at this higher price, making a little profit on the exchange.
If I am correct, the implications of this is that when the squeeze comes there will be Shorts buying to cover their position as well as new longs buying, but no enitty selling in an attempt to supress the rise in share price. It would be like having a fire with 2 people spraying gasoiline on it and no one trying to put it out. The heights the price could reach could be enormous.
I hypothesize this without any judgment as to whether the Shorts are or are not getting punished or getting what they deserve, but simply as a possible fact. If the price soars beyond a "normal" short squeeze, it would seem that it would greatly benefit the Longs as we could sell, or sell and plan to buy back when the squeeze has subsided, or simply hold in the belief that better share prices still lie ahead. That choice is for each Long to make, and again I offer no judgment on that decision, but I wanted to put this forth as to what could be an extremely good situation, courtesy of the Shorts.
I welcome thoughts and criticisms, as many here are more knowledgeable as to the inner workings of the market.
The hypothesis is reasonable but not supported by the data. Yesterday´s heavy call volumes are not showing up in the open interest data, so one must assume that the calls were bought and exercised, presumably to close out short positions because the strike price plus premium paid approximated the current market price. If this pattern continues, there may not be much of a short squeeze.