Sooo,
- Outright shorting isn't a viable route for the shorts because of low availability,
- So they buy large quantities of puts.
- This shifts the shorting to the market makers, who sell short IOC shares to delta hedge their open put positions.
But even the market makers have limited time to cover naked short positions, right. It explains the rising failures to deliver count.
However
The Securities and Exchange Commission has adopted a final rule that makes permanent its September Emergency Order eliminating the options market-maker exception to the close-out requirement of Regulation SHO. This update examines the new final rule, which also provides new guidance on what constitutes bona-fide market-making activity for purposes of the market-maker exemption from the locate requirement of Regulation SHO.
With the following implications:
We find that eliminating the Options Market Maker Exception to SEC Regulation SHO led to fewer and less persistent FTDs in optionable stocks. We also find that optionable stocks became more expensive to borrow after the Exception was eliminated, which is consistent with higher demand to borrow stocks to cover short sales. These results suggest that eliminating the Exception raised the cost to short through the options market and thus made options a less attractive alternative for short sellers. Finally, we find that elimination of the Exception lowered options market liquidity.
Sooo, sooner or later these market option makers have to buy back their nakedly shorted shares. Basically what the shorts do is force short positions on the market makers as these have some more leeway to do that, but even this is temporary.