Anyone with clarity on the affect of the SEC ruling on options?

Maybe I'm missing something here...

Reading the Following Emrgency Order:

http://www.sec.gov/rules/other/2008/34-58592.pdf

"Similar to the Amended July Emergency Order, we are providing a limited exception for certain bona fide market makers. We believe this narrow exception is necessary because such market makers may need to facilitate customer orders in a fast moving market without possible delays associated with complying with the requirements of this Order."

"IT IS THEREFORE ORDERED that, pursuant to our Section 12(k)(2) powers, the following entities are excepted from the requirements of the Order: registered market makers, block positioners, or other market makers obligated to quote in the over-the-counter market, in each case that are selling short a publicly traded security of an Included Financial Firm as part of bona fide market making in such security."

"The definition of “short sale” shall be the same definition used in Rule 200(a) of Regulation SHO and the requirements for marking orders “long” or “short” shall be the same as provided in Regulation SHO."


In the same order that grants an exception to MM's they state:

"Finally, to facilitate the expiration of options on September 20th, options market makers are excepted from the requirements of this Order until 11:59 p.m. on September 19th when selling short as part of bona fide market making and hedging activities related directly to bona fide market making in derivatives on the publicly traded securities of any Included Financial Firm.

IT IS THEREFORE ORDERED that, pursuant to our Section 12(k)(2) powers, the requirements of this Order shall not apply, until 11:59 p.m. on September 19, 2008, to any person that is a market maker that effects a short sale as part of a bona fide market making and hedging activity related directly to bona fide market making in derivatives on the publicly traded securities of any Included Financial Firm."


And finally from 200(a) SHO

"Upon written application or upon its own motion, the Commission may grant an exemption from the provisions of this section, either unconditionally or on specified terms and conditions, to any transaction or class of transactions, or to any security or class of securities, or to any person or class of persons. "

A broker or dealer must mark all sell orders of any equity security as "long" or "short."


An order to sell shall be marked "long" only if the seller is deemed to own the security being sold pursuant to paragraphs (a) through (f) of this section and either:

The security to be delivered is in the physical possession or control of the broker or dealer; or


It is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than the settlement of the transaction.



Reasonably believes is a loophole of sorts to Short...

"I had a private deal with Joe blow to transfer and demat his physical shares to my brokerage account"

"I had a reasonable belief I would be in possession and control of the shares by Settlement. The Joe Blow deal fell apart. I took action the best I could to close out the trade and cover my position."

Sorry... Please exempt under grounds of reasonable belief of delivery.
 
Associated Press
12:47 PM CDT, September 21, 2008

CHICAGO - The leaders of two of the world's largest options trading and clearing entities are criticizing the Securities and Exchange Commission's emergency ban on short-selling scores of financial stocks.

William Brodsky, the chief executive officer of the Chicago Board Options Exchange, says the ban announced Friday is "a draconian measure that will result in the sudden and severe removal of liquidity from the marketplace."

Wayne Luthringshausen, chairman and CEO of Chicago-based The Options Clearing Corporation, says he understands the need to curb abusive practices.

But he says the SEC order is too restrictive and could "harm a marketplace that a great many investors have come to rely on to manage risk in their equity portfolios."


http://www.chicagotribune.com/news/local/wire/chi-ap-il-shortselling-chic,0,3384226.story
 
Quote from dagnyt:

You may still buy puts on any of these stocks. If already own puts, that's not a problem.

You may still sell calls on any of these stocks.

You may exercise a put on any of these stocks.

BUT - once you have a short position the the stock (as the result of a put exercise or a call assignment), your broker will probably not be able to borrow the shares and you will be forced to buy them in.

But, the bottom line remains: You may buy puts. The only time there will be a problem occurs AFTER the option turns into a short stock position.

Mark
http://blog.mdwoptions.com/options_for_rookies/
More...

I still have a short position (pre-existing) on several of these stocks, most from exercising puts that went into the money, but some that were just outright shorts from before the order. Not been bought in. Question is, do I have to cover? Or does the ban only apply from now on.
 
Quote from Cutten:

Question is, do I have to cover? Or does the ban only apply from now on.
More...

You have a short position. That's ok.

But, your brokerage firm must still find the shares to borrow. Those shares can be used to cover your short. But, if your broker cannot borrow those shares, then it's your broker - not the new rule - who may force you to buy back those shares.

I know it's not what you want to do, but if you buy one put and sell one call - per 100 shares - (same strike and expiration date), you will re-establish your position exactly as it is now - if forced to buy in those shares.

Suggestion: Do not try to hide from your broker. Call them and ask two key questions:

1) Do they think they will be able to borrow the shares (they may already have them in house)

2) IF they decide to buy you in - do you get any warning. My fear is that you will discover you were bought it (at a high price) without any warning. And one day later than the trade occurred. Thus, it would be better to cover yourself and hedge the deltas some other way.

best of luck
Mark
 
IMPORTANT: Due to new Securities Exchange Commission rules, short selling on certain financial securities are not permitted from September 19, 2008 through October 2, 2008. The complete list of stocks which are unavailable for shorting can be found here. Any previous existing open orders to short sell these securities have been cancelled.

Attention Options Customers: Due to the above new SEC regulation on short sales, certain options positions on these underlying securities expiring September 20, 2008 (long uncovered puts and short uncovered calls) that were entered into after September 18, 2008 may be subject to being closed by E*TRADE Securities at or before expiration. E*TRADE Securities may also take action to close the assigned/exercised underlying security in the event that the options are assigned or exercised. Please note that options positions entered into prior to September 19, 2008 are not subject to this action

To avoid the above action, you may wish to close the above mentioned options positions prior to option expiration dates in the event that the long option holders exercise the options prior to expiration.

Again, please note that the above circumstances are a direct result of the above described SEC regulation on short sales.
 
Cutten,

The order 34-58592 does not mention any restrictions related to holding short positions. It only restricts short SALES (to prevent driving share prices down).
http://www.sec.gov/rules/other/2008/34-58592.pdf
(page 3)
"This emergency action should prevent short selling from being used to drive down the share prices of issuers even where there is no fundamental basis for a price decline other than general market conditions.
IT IS ORDERED that, pursuant to our Section 12(k)(2) powers, all persons are prohibited from short selling any publicly traded securities of any Included Financial Firm. "


Regardless, you are at the mercy of your broker, as Mark has indicated.
 
PocketChange,

It is quite simple:

The first exception, you quoted, is indented for registered STOCK market makers. (This exception remains in effect).

And the second exception is for DERIVATIVE market makers. (It has expired on September 20).

So starting Monday, derivative market makers won't be able to short financial stocks to effectively hedge their new short puts. You can read more comments on this subject here: http://www.futuresmagazine.com/cms/futures/Breaking News/2008/09/19-sept-07
Hopefully following recommendation: http://www.sec.gov/news/press/2008/2008-213.htm will get implemented.
 
Quote from HOBO:

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I could be wrong, but the very first thing I would look to do Monday (if not right now) morning is find a new broker and get my positions out of E*Trade as soon as possible. Tell them you are moving with a pre-market phone call and perhaps they will not close positions for you.

They apparently are threatening to clsoe some positions? How about the offsetting hedges?

This is more than outrageous. It's stupidity of the highest order.

Even if they come to their senses and do not enforce these rules, the fact that they even consider this makes them useless as a broker.

Get the heck out of there ASAP

Mark
 
Quote from HOBO:

Cutten,

The order 34-58592 does not mention any restrictions related to holding short positions. It only restricts short SALES (to prevent driving share prices down).
http://www.sec.gov/rules/other/2008/34-58592.pdf
(page 3)
"This emergency action should prevent short selling from being used to drive down the share prices of issuers even where there is no fundamental basis for a price decline other than general market conditions.
IT IS ORDERED that, pursuant to our Section 12(k)(2) powers, all persons are prohibited from short selling any publicly traded securities of any Included Financial Firm. "


Regardless, you are at the mercy of your broker, as Mark has indicated.
More...

"no fundamental basis for a price decline". Does Cox have a history of hallucinogenic drug use or something?
 
IB posted the following bulletin this morning. Their interpretation of the rules does NOT seem correct to me. Our other broker does not have this interpretation either.

Does anyone have any idea who is right?

--------------------------------

Interactive Brokers Bulletin Board
________________________________________
URGENT NOTICE REGARDING TRADING IN OPTIONS ON RESTRICTED SECURITIES

The SEC has imposed emergency rules for short sale and economically similar dealing in approximately 800 financial services companies. Part of the new rules impact options trading strategies that can lead to a short sale, even if temporarily. The following limitations on option trading have been put in place to conform to the SEC regulations. Additional information, and updates to the SEC rules as they become available, can be found on: http://www.interactivebrokers.com/en/trading/shortableStocks.php

Allowed:
(A1) purchase of call options and exercise of long call positions
(A2) sale of call options against an existing long stock position in a ratio less than or equal to 1 call per 100 shares
(A3) purchase and sale of put options
(A4) purchase of single stock futures

Not Allowed:
(NA1) exercise of puts that would lead to a short stock position
(NA2) selling uncovered calls or uncovered single stock futures (coverage via stock)
(NA3) selling long stock if so doing will expose an uncovered short call position

Please be aware that the actual rules and interpretations on the rule are being refined by the SEC on an ongoing basis. We kindly request clients do not contact the help desk for interpretation of the option restrictions. Customer Service operations may not be aware of the rule modifications due to the speed with which they are being issued and modified. Instead, please monitor the above web page for updates.
 
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