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(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.
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'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.
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Just checked with the cboe. Option open interest is reported with a day lag. Volume is reported same day. So, tomorrow am will reflect yesterdays OI change, so it can be properly associated with the volume yest. to measure the real change
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'trans' pid='21810' datel Wrote:Just checked with the cboe. Option open interest is reported with a day lag. Volume is reported same day. So, tomorrow am will reflect yesterdays OI change, so it can be properly associated with the volume yest. to measure the real change
Wow - that is news to me. I will watch to see if this change in open interest shows up tomorrow... (it's the little details that get you !)
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'johnwgrant' pid='21811' datel Wrote:
'trans' pid='21810' datel Wrote:Just checked with the cboe. Option open interest is reported with a day lag. Volume is reported same day. So, tomorrow am will reflect yesterdays OI change, so it can be properly associated with the volume yest. to measure the real change
Wow - that is news to me. I will watch to see if this change in open interest shows up tomorrow... (it's the little details that get you !)
I believe that the "day lag" means that what you see as open interest today is yesterday´s open interest at the close. Updating occurs overnight, as it were. Today´s open interest indicates that all of those calls yesterday were not new positions, nor were they to close out old positions because the open interest data for those strike prices have not changed very much.
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The correct open interest that matches up with yesterday's volume will appear tomorrow am, or another wap warp back-1 day and the volume and open interest data match up correctly. almost noone knows this and the exchanges don't want you to know too much. I had to crunch the data and discovered they do not match same day, warp OI -1 day and they match up for correct OI change
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Guys,
I've been in the options business a long time. Buying deep in the money calls is not a way to cover exposure without "moving the stock". Those options have very high deltas, and those deltas need to be hedged. So one way or another, the stock is being bought by someone against those calls. Desks don't just sell deep in the money calls and not hedge them. They are effectively just buying the lower strike puts. I can tell you with near certainty that all of these deep in the money calls that are trading are shorts trying to get shorter because there's no borrow available in any real size. People that want to be short 100's of thousands of shares cannot find the stock. We've seen people putting on gigantic synthetic shorts for 2 months now. Mostly up on the 90 line in April (which didn't work out for them) and now some in May. If you want to get short the stock synthetically it costs about $3.30 through June expiry. So you can set up a short here for the next 7 weeks that can't be called away from you, but you're getting short at 74.20 instead of the current 77.50.
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'bam' pid='21815' datel Wrote:
Guys,
I've been in the options business a long time. Buying deep in the money calls is not a way to cover exposure without "moving the stock". Those options have very high deltas, and those deltas need to be hedged. So one way or another, the stock is being bought by someone against those calls. Desks don't just sell deep in the money calls and not hedge them. They are effectively just buying the lower strike puts. I can tell you with near certainty that all of these deep in the money calls that are trading are shorts trying to get shorter because there's no borrow available in any real size. People that want to be short 100's of thousands of shares cannot find the stock. We've seen people putting on gigantic synthetic shorts for 2 months now. Mostly up on the 90 line in April (which didn't work out for them) and now some in May. If you want to get short the stock synthetically it costs about $3.30 through June expiry. So you can set up a short here for the next 7 weeks that can't be called away from you, but you're getting short at 74.20 instead of the current 77.50.
Obviously I don't understand, bam. Why then is all that stock "being bought" not seemingly showing up in the market trading? Who is "buying the lower strike puts", the desks or the shorts. How do they "get short the stock synthetically"? So the shorts are significantly increasing their short position and betting against a deal by June 21? Could that result in an even bigger squeeze?
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'bam' pid='21815' datel Wrote:
Guys,
I've been in the options business a long time. Buying deep in the money calls is not a way to cover exposure without "moving the stock". Those options have very high deltas, and those deltas need to be hedged. So one way or another, the stock is being bought by someone against those calls. Desks don't just sell deep in the money calls and not hedge them. They are effectively just buying the lower strike puts. I can tell you with near certainty that all of these deep in the money calls that are trading are shorts trying to get shorter because there's no borrow available in any real size. People that want to be short 100's of thousands of shares cannot find the stock. We've seen people putting on gigantic synthetic shorts for 2 months now. Mostly up on the 90 line in April (which didn't work out for them) and now some in May. If you want to get short the stock synthetically it costs about $3.30 through June expiry. So you can set up a short here for the next 7 weeks that can't be called away from you, but you're getting short at 74.20 instead of the current 77.50.
Obviously I don't understand, bam. Why then is all that stock "being bought" not seemingly showing up in the market trading? Who is "buying the lower strike puts", the desks or the shorts. How do they "get short the stock synthetically"? So the shorts are significantly increasing their short position and betting against a deal by June 21? Could that result in an even bigger squeeze?
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