LFIN and "shorting to zero"

M

m22au

Longfin (LFIN) last traded on Friday April 6.
Today is Friday April 20, the day of the April options expiry.

The LFIN saga has resulted in some 'interesting' consequences for people who are:
* short the stock
* holding options positions in LFIN, especially long puts

LFIN article in FT Alphaville:

"Now NASDAQ gets in a tangle"
2018-04-19T21:11:26.000Z By: Jamie Powell
https://ftalphaville.ft.com/2018/04/19/1524172286000/Now-NASDAQ-gets-in-a-tangle/

Some related articles:

"'Go to Zero' Isn't Great for Short Sellers"
"It's hard to bet on disaster, because that's when bets tend not to get paid off. "
April 11, 2018, 5:10 PM EDT by Matt Levine
https://www.bloomberg.com/view/articles/2018-04-11/-go-to-zero-isn-t-great-for-short-sellers

"Getting caught short"
April 6, 2018 9:44 p.m. ET by Bill Alpert
https://www.barrons.com/articles/getting-caught-short-1523065469

Tags: LFIN Longfin Northern Rock

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Longfinoptions on Reddit:
https://www.reddit.com/r/LongFinOptions/

Planned AMA for this weekend: Rich Gates, TFS Capital (Don't miss out!)
https://www dot reddit.com/r/LongFinOptions/comments/8deh4x/planned_ama_for_this_weekend_rich_gates_tfs/

https://www.reddit.com/r/AMA/
https://www.reddit.com/r/IAmA/

OCC memos:
https://www.theocc.com/webapps/infomemos

Memos relevant to LFIN are:

42875 (April 10) TRADING HALTS WEEKLY UPDATE - REMOVAL FROM EX BY EX PROCESSING
(weekly memo from OCC about removal of automatic exercise)

42883 (April 11) STOCK RESTRICTION (LFIN)
LFIN "no longer eligible for stock loan or collateral pledge at OCC"

42911 (April 17) TRADING HALTS WEEKLY UPDATE - REMOVAL FROM EX BY EX PROCESSING
(weekly memo from OCC about removal of automatic exercise)

42930 (April 19) LONGFIN CORPORATION – BROKER-TO-BROKER SETTLEMENT/EXERCISE CONSIDERATIONS OPTION SYMBOL: LFIN

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Options expiry data for LFIN puts:
https://www.nasdaq.com/symbol/lfin/option-chain?&money=all

27,401 put contracts in April
8,618 in May
8,967 in June
5,618 in September

Total put contracts = 50,604

From the above FT article "Now NASDAQ gets in a tangle",

"Tomorrow, 26,951 of Longfin put options will expire, representing 26,951,000 shares as each options contract is for 100 shares. In other words, the rights to sell account for 237 per cent of the free-float."

This is slightly lower than the figure of 27,401 which I calculated. However I think the author may have added in an extra zero for the number of underlying shares. It should be closer to 2.7 million shares and not 27 million shares.

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Its possible to exercise the puts right? If so, its probably a good idea to do so. The only question is how low a strike would it make sense to exercise them. I havent followed all the developements but even as low as $10 might be a decent play to exercise. If they get suspended the stock will go to the gray sheets and probably trade under $5. Of course, covering in the greys is a pain and I have seen big squeezes there
 
Daal said:
Its possible to exercise the puts right? If so, its probably a good idea to do so. The only question is how low a strike would it make sense to exercise them. I havent followed all the developements but even as low as $10 might be a decent play to exercise. If they get suspended the stock will go to the gray sheets and probably trade under $5. Of course, covering in the greys is a pain and I have seen big squeezes there
More...

Disclosure: I don't own any puts, but I am following this story with interest.

I have read some posts (I think on the Reddit Longfinoptions forum) that RobinHood were refusing to allow exercise of puts that would result in a newly created short position. It's possible that other brokers might have a similar policy.

I am unsure if this policy relates to the short position - and the difficulty in locating shares to borrow, or if it relates to the customer's account size, and the possible lack of margin to support the short position.

However it does raise an interesting question relating to long put options positions generally - do brokers have the right to disallow exercise when the options exercise would result in a short position in a stock when they cannot locate shares to borrow?

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m22au said:
Disclosure: I don't own any puts, but I am following this story with interest.

I have read some posts (I think on the Reddit Longfinoptions forum) that RobinHood were refusing to allow exercise of puts that would result in a newly created short position. It's possible that other brokers might have a similar policy.

I am unsure if this policy relates to the short position - and the difficulty in locating shares to borrow, or if it relates to the customer's account size, and the possible lack of margin to support the short position.

However it does raise an interesting question relating to long put options positions generally - do brokers have the right to disallow exercise when the options exercise would result in a short position in a stock when they cannot locate shares to borrow?

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More...
Yeah, it sounds like there might be some legal issues around that
 
Daal said:
Yeah, it sounds like there might be some legal issues around that
More...

Especially since the open interest for puts is 50,604 contracts: over 5 million shares. Maybe not all of them will be exercised (eg. $2.50 puts), and maybe some participants are long a bear spread, but still, the number of bearish positions are large relative to the publicly traded float.

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In the https://www.reddit.com/r/LongFinOptions/ forum there are various threads from users describing their experiences with brokers (and communication with brokers) about exercising puts.

RobinHood:
https://www dot reddit.com/r/LongFinOptions/comments/8dj91n/robinhood_users_last_stand/

Schwab:
https://www dot reddit.com/r/LongFinOptions/comments/8dnyb5/spoke_with_schwab/

Ally Financial:
https://www dot reddit.com/r/LongFinOptions/comments/8dn9nj/spoke_with_ally_about_exercising_my_puts/

TD Ameritrade:
https://www dot reddit.com/r/LongFinOptions/comments/8djzs5/exercised_10_420_25_puts_at_tda_today/

IB:
https://www dot reddit.com/r/LongFinOptions/comments/8dnunn/ib_on_new_occ_memo/
https://www dot reddit.com/r/LongFinOptions/comments/8d94wu/ib_important_notice_regarding_lfin_exercise/

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Matt Levine article today about LFIN:

"Being Short and Right Can Be Bad"
https://www.bloomberg.com/view/articles/2018-04-20/being-short-and-right-can-be-bad

includes a link to a thread on r/investing about LFIN put options:
https://www dot reddit.com/r/investing/comments/8af3zl/official_lfin_put_holders_thread/

Article in Barrons from 2011 about these issues:

"Even Short-Sellers Burned by Chinese Shares"
June 18, 2011
By Bill Alpert
https://www.barrons.com/articles/SB50001424053111904113704576383892664177456

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Robinhood again:
https://www dot reddit.com/r/RobinHood/comments/8doaml/this_is_how_robinhood_is_handling_lfin_options/

"Can I still exercise my LFIN option?
Yes. If you want to exercise your LFIN contract, you can simply submit a request with your instructions. If you want to exercise a call, you need enough buying power to purchase 100 shares of LFIN at the option's strike price. If you want to exercise a put, you need to own 100 shares of LFIN.

"Can I exercise my option if I don’t have enough buying power/shares?
No. Robinhood won’t allow any user to enter a short position in order to exercise an options contract. "

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