You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Would this be illegal to do?
- Thread starter thriftybob
- Start date
Quote from thriftybob:
Stock trades 1 million shares per day
Buy 300,000 shares of stock
Sell up to 300,000 covered calls
Buy up to 300,000 puts
Short 425,000 shares
Wait for panic and crash to end or option expiration
Calls expire worthless
Sell 300,000 Puts or put 300,000 shares
Buy up to 300,000 calls for next month
Sell up to 300,000 puts
Cover 425,000 shares
Wait for price to get back up or expiration
You get the idea. In other words postition the options, then buy or sell shares to move the stock to make the options pay.
Also, Can you tell me where I can find the rules regarding this?
Hmmm....well, you're putting on a conversion for 300,000 shares by "legging" it...pretty risky in itself. And where are you planning on buying all the options? Next, who in the heck is going to pay you for the 425K shares that you short? And, then, why would anyone care about the 425K short stock...no "panic" since most serious traders always hedge themselves anyway.
The unusual activity in the options would red flag the regulators, so if by chance anything did work, you would have to give the money back...and, yes...stock manipulation is a felony I believe.
Gigantic risk, little chance of success....IMO.
Don
Don, Do you happen to know where to find out if this would constitute stock manipulation or not? Does the SEC need to prove intent to drive the price down, or would the fact that it went down each time they did it be sufficient proof? Also, Would the fact that they are both long and short large qtys of the same stock at the same time be a red flag to the SEC indicating that there might be a manipulation in process?
thanks
zdreg, I haven't told the fund that I've reported/questioned their positions with the SEC, yet. I was planning to do that a few days before options expiration when they'd normally have tried to drive it down. I figure when they know its being watched, they will be quick to close it out instead of continuing the game.
thanks
zdreg, I haven't told the fund that I've reported/questioned their positions with the SEC, yet. I was planning to do that a few days before options expiration when they'd normally have tried to drive it down. I figure when they know its being watched, they will be quick to close it out instead of continuing the game.
Quote from thriftybob:
Don, Do you happen to know where to find out if this would constitute stock manipulation or not? Does the SEC need to prove intent to drive the price down, or would the fact that it went down each time they did it be sufficient proof? Also, Would the fact that they are both long and short large qtys of the same stock at the same time be a red flag to the SEC indicating that there might be a manipulation in process?
thanks
zdreg, I haven't told the fund that I've reported/questioned their positions with the SEC, yet. I was planning to do that a few days before options expiration when they'd normally have tried to drive it down. I figure when they know its being watched, they will be quick to close it out instead of continuing the game.
(Not a legal opinion, just my personal understanding, nothing to do with my position at Bright Trading or any affiliate)...
The "aggregate" position is required of everyone...which means that if you're long 300K shares, and then short 425K shares, you are in fact only short 125K shares. This is the other problem with the proposal you set forth. Now you have 300K worth of short calls that you have no control over, and another 125K shares of short stock. The holders of the calls may exercise early...when do you, if you do exercise your puts?
The primary problem is that there would be no need for any type of "panic" situation in this scerario, and since the stock trades so little, the options trade little as well....I don't know if you've ever tried to buy 200 calls or puts, but 3,000 would never happen.
The same scenario is generally thought up some time in a new(er) traders first year or so.....i.e. buy stock, and then short stock, thinking it's a right hand/left hand kind of thing.....thinking you can hit bids with the long stock thus making the stock go down to profit from the shorts. Can't happen..
Don
Quote from wabrew:
Are these January options?
If so, then it is probably a tax trade. The contra party to the options trade has taken a large short position when he sold the original puts. He probably sold the stock short to the fund that originally purchased the stock.
Puts usually sell for less than calls so the contra party has a very small cost basis in their long call position. I want this side of trade!
Fund has pretty much unlimited risk of loss and contra party has pretty much sweet deal - looks like this stock goes Up!
Care to name the stock and the Fund?
Edit - oops - this does not work since the contra party short position eliminates the gain if stock goes up.
Let me try to clarify what I meant on this post.
Don Bright is correct. The first three parts of this trade is just a simple conversion. (the long put position protects the long stock position, the puts were paid for from sale of calls) So for practical purposes - there is no risk on the long position. (Not much profit either - unless the stock is called early and the converter owns puts that may become valuable if stock falls before expiration.)
Also, there were probably two other parties to this conversion. 1) Somebody wanted to buy calls on 300,000 shares.
2) Somebody else (an option writer) probably bot stock and sold straddles to the converter. This party was looking to profit if the stock went up (by amount of straddle premium) or average down if the stock went down.
The fourth part of the trade, the short position, is just a naked short. Lots of risk/reward potential. But the short sale in and of itself does not mean the stock goes down since the conversion on the original 300,000 cannot be lifted without exposure.
I do not see anything illegal here. Just a lot of risk
So basically, you could do something like this if you wanted to as long as you didn't tell anyone that you were shorting it with the intent of moving the price down?
I'd agree you probably couldn't get in or out of more than 50,000 or 100,000 shares worth of options efficiently.
I just don't see any possible reason to be both long and short a large qty of the same issue at the same time unless the purpose is to move the share price (to me that means manipulate it) to where the options pay. That's why I asked if the SEC would see that as a red flag.
I'd agree you probably couldn't get in or out of more than 50,000 or 100,000 shares worth of options efficiently.
I just don't see any possible reason to be both long and short a large qty of the same issue at the same time unless the purpose is to move the share price (to me that means manipulate it) to where the options pay. That's why I asked if the SEC would see that as a red flag.
Quote from thriftybob:
So basically, you could do something like this if you wanted to as long as you didn't tell anyone that you were shorting it with the intent of moving the price down?
I'd agree you probably couldn't get in or out of more than 50,000 or 100,000 shares worth of options efficiently.
I just don't see any possible reason to be both long and short a large qty of the same issue at the same time unless the purpose is to move the share price (to me that means manipulate it) to where the options pay. That's why I asked if the SEC would see that as a red flag.
Once again You are not "long and short" - you aren simply net short and cannot hit downticks (unless part of SHO, of course).
Don
If they were simply net short, why would the fund show in the qtrly report a 300,000 long position and then a 425,000 short position as a footnoted item?
Quote from thriftybob:
If they were simply net short, why would the fund show in the qtrly report a 300,000 long position and then a 425,000 short position as a footnoted item?
Different settlement dates of accumulated purchases and sales probably. Or an attempt to skirt the aggregation rule. Perhaps you can PM the report and I'll take a glance at it.
But, no matter how you slice it, if you're short more than you're long, you're short, right?? LOL.
Don