Naked Short Question

[nravo]

I couldn't short a stock (FXM) because my broker (IB) couldn't find it. So, I wrote a call, I figure has a good chance of going ITM with the thought being that I will have the stock as a short position if it expires ITM and I don't own the stock. True? Legal? Caveats?

 

[Darkhand]

You're shorting the option not the stock. There's a difference.

PS: Why are you shorting an option that will go ITM?

 

[nravo]

Um yes, I know the difference between shorting a stock and an option.

I am doing this to establish a short position in a stock, for which my broker will not allow a short position because they cannot find the stock to borrow. Hence, naked stock.

If the OPTION I sell goes ITM and expires, I will have a short position in the stock assigned to me. (If I write a call on FXM with a 99 strike and it winds up at 99.5, I will have a short position @ 99 a day after the expiration.) Hence, I have a short stock position in a stock my broker would not allow a short position in. Make sense now?

So can one do this with stocks the SEC is prohibiting shorting of? Or is there some mysterious cash settlement on options on these stocks that's mandatory?

 

[ssbc19]

I have no idea about your question.

I'm just wondering why you are making this so complicated?

You're selling a call to get assigned stock of a very low volume ETF that tracks the peso?

If you're bearish why not just sell the peso?

The commissions would be less, the liquidity would be a lot better, etc...

Or buy a ITM put

 

[nravo]

Quote from ssbc19:

I have no idea about your question.

I'm just wondering why you are making this so complicated?

You're selling a call to get assigned stock of a very low volume ETF that tracks the peso?

If you're bearish why not just sell the peso?

The commissions would be less, the liquidity would be a lot better, etc...

Or buy a ITM put

I want to short the Peso ETF. Shouldn't be any more complicated than going long the ETF, in theory. ( I also short Peso FX, btw, and sometimes go long or short the ETF as a partial FX hedge). I'd rather not but a put as they usually go out only three months and I am trying to establish a six to 12-month bearish position.

Gauging from the emails I received, the way I have envisioned it, selling a call to get either premium or a short position is the way around SEC rules prohibiting naked shorting, with the caveat that a broker might force cash settlement. We'll see on Sept. 18.

 

[christianhgross]

If you short a call, what it means is that you will have to deliver the stocks...

http://biz.yahoo.com/opt/basics3.html

This gives the option holder the right to buy 100 shares (per option) of the underlying stock from the assigned option buyer at the strike price of the short call. This means that the option seller must buy the underlying asset at the current price and sell it at the call's lower strike price to the assigned option holder, thereby incurring a loss on the trade (current price - strike price = loss).

You are going to need to deliver 100 shares at expiry. Should you not be buying a put????

Christian Gross

 

[ssbc19]

Quote from nravo:

I want to short the Peso ETF. Shouldn't be any more complicated than going long the ETF, in theory. ( I also short Peso FX, btw, and sometimes go long or short the ETF as a partial FX hedge). I'd rather not but a put as they usually go out only three months and I am trying to establish a six to 12-month bearish position.

Of course it's going to be more complicated. The average volume is about 20,000 shares a day. It's not popular, not a lot of people own it, therefore it's harder to find people to borrow the shares from.

I guess I still don't understand why you're bothering with the ETF if you're short the Peso already. Especially since you can do the same trade with a lot less money with the spot market