Short Stock 'Buy-Ins' and Other Questions

[VTTrader]

Not sure if this is the right forum for this, but just a couple of questions:

I'm interested to know under what circumstances a 'forced buy in/buy to cover' situation typically occurs when one holds a short stock position.

1) Ie, do such buy-in demands usually occur during advances in stock price (potentially leading to the dreaded 'short squeeze'), or can you get hit with a demand to cover your position at any time, even when price is declining?

2) If anyone cares to comment, how in general how common is it to get hit with forced buy-ins? Is it that 'it hardly ever happens unless the share price increases a lot', or is it 'happens all the time, pal, totally at random', or is the frequency somewhere in between?

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I'm mainly curious because I'd like to write some covered puts (on highly liquid, large-cap equities, btw), and am just trying to get some idea of how likely it is that I'd find the underlying short closed, leaving me with a naked put!

Thanks for any input you may wish to offer!

 

[1245]

Quote from VTTrader:

Not sure if this is the right forum for this, but just a couple of questions:

I'm interested to know under what circumstances a 'forced buy in/buy to cover' situation typically occurs when one holds a short stock position.

1) Ie, do such buy-in demands usually occur during advances in stock price (potentially leading to the dreaded 'short squeeze'), or can you get hit with a demand to cover your position at any time, even when price is declining?

2) If anyone cares to comment, how in general how common is it to get hit with forced buy-ins? Is it that 'it hardly ever happens unless the share price increases a lot', or is it 'happens all the time, pal, totally at random', or is the frequency somewhere in between?

====

I'm mainly curious because I'd like to write some covered puts (on highly liquid, large-cap equities, btw), and am just trying to get some idea of how likely it is that I'd find the underlying short closed, leaving me with a naked put!

Thanks for any input you may wish to offer!

You should ask your broker for their procedure. When you short a stock and it's hard to borrow with a high negative interest rate, you can assume at some point before settlement you might be at risk. If the Prime broker can't make good delivery for you, you should get a warning from them that you're at risk of a buy in. This will give you a small amount of time to cover.

As to the price, assume you won't be happy with it. Sometimes buy in are at the market on the open, sometimes with Vwaps during a selected time period. Assume others are being bought in to, creating demand. Every broker is different. They do what they have to not to fail on delivery. If they fail, the firm as a whole can be restricted from issuing locates for a period of time.

 

[VTTrader]

Quote from 1245:

You should ask your broker for their procedure. When you short a stock and it's hard to borrow with a high negative interest rate, you can assume at some point before settlement you might be at risk. If the Prime broker can't make good delivery for you, you should get a warning from them that you're at risk of a buy in. This will give you a small amount of time to cover.

As to the price, assume you won't be happy with it. Sometimes buy in are at the market on the open, sometimes with Vwaps during a selected time period. Assume others are being bought in to, creating demand. Every broker is different. They do what they have to not to fail on delivery. If they fail, the firm as a whole can be restricted from issuing locates for a period of time.

Thank you very much for that info!