question about selling a Deep In-The-Money call

ajacobson said:
If the stock cannot be borrowed to cover the short - the brokerage house will buy you in.
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You definitely don't get immediately bought in if you sell at DITM call. Not sure which broker, but someone did it in this post: TLRY Options

I did google reg SHO violations and was already aware of the IB fine, but I don't see anything that suggests selling a call without a locate is an SHO violation. Do you know of anything specific in the regulation that says otherwise or have a specific case in mind? Of course it could lead to a violation in the future, but that's not the question.
 
Again I would Google the reg. SHO violations. I can sight dozens and I lived through one at optionsXpress, Go look at SEC V optionsXpress and I would start Crowdfunding your defense now.
 
xiaosai said:
Hi all,
If I want to build a short position, but I can not borrow shares from my broker. can I sell a deep In-The-Money call and wait to option exercising?

Thanks.
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guru said:
Happens often when options get assigned or exercised, but if the broker doesn’t have shares available then they will ask you to buy them back in the morning after you’ll get short shares assigned.
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Even if the broker does have shares available for shorting and allows you to short these shares as many brokers might outright forbid you, you would be shorting the shares at an extremely unfavorable price, how are you going to guarantee to make money? Let's say the underlying is currently at $30, you sell a deep ITM call with the strike at $20 and you get assigned, assuming you get to keep the short position, you just made an instant loss of $10 per share, with 1 call contract covering 100 shares, that's $1K loss instantly!! Are you going to have enough margin to cover the losses while you wait for the underlying to drop below your assigned strike? What if the underlying goes right back up? With the market, anything can happen and you would be on the hook and screwed.

Bottom line: not worth it.
 
ajacobson said:
Again I would Google the reg. SHO violations. I can sight dozens and I lived through one at optionsXpress, Go look at SEC V optionsXpress and I would start Crowdfunding your defense now.
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Perhaps there's been a misunderstanding. I'm not doing such trades, or even trying to say you're wrong. I'm just trying to understand under what circumstances you think selling a call is a violation. Any ITM call? DITM with a reasonable expectation of assignment? If you sell OTM and the stock goes up, do you immediately have to cover?

Correct me if I'm missing something, but the optionsxpress case looks similar to the one I posted earlier: several days or weeks of consecutive failure to deliver using but-writes to create sham resets. In the trade we're discussing, there's no failure to deliver. I can certainly see it being argued it's effectively a naked short, but I'm haven't found a case where that's been tried.
 
They were originally boxes and when the short call got exercised he would re-hedge the missing piece with a buy-write and sell the stock out just leaving the short call. Thought the buy-write would conceal the attempt to just short the call. Yes, they are similar to the Jeff Wolfson case where there were multiple unable to locate failures. Those were initially boxes as well. They pretty much all come down to short calls in HTB names and the rise and repeat - re-hedge with a short call. Feldman the oX customer got off - the firm was tagged and the folks who had oversight lost their jobs and one was barred for life. The thought process was the firm facilitated it. The ALJ tagged Feldman as well and then the higher court overturned it.
That is why no firm will allow it. You may get the first short call done, but the re-hedge after the call get's exercised and an inability to locate occurs twice will trigger a SHO violation. Most firm won't allow the first call sale even if it's part of a more complex strategy.
In Wolfson - in addition to paying the profits back there was a $2.5Million fine and a year suspension. Then even after the suspension was served no firm wanted to do business with him. Also, keep in mind the disgorgement is not tax deductible whereas the initial profits were taxable so add another $4 -$5 million to the cost + seven years of legal fees.
In Wolfson his brother did the same trades as well and the size was smaller, but they both got tagged.
 
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guru said:
Happens often when options get assigned or exercised, but if the broker doesn’t have shares available then they will ask you to buy them back in the morning after you’ll get short shares assigned.
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A few months ago, my broker kept calling me asking me to loan them my thinly traded stocks for a princely monthly interest rate. Loaned to them and received the interest for two days. Amazing return for two days! Wish I could do this 365 days a year.:D
 
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