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They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it.

by tsdlts 6y ago

tartoran 6y ago
How likely is it for them to close their position when the price hit so high? That would be a huge loss. Why not wait a bit, make a few desperate phone calls and leverage their power before that?
- whimsicalism 6y ago
  Because of the expiration date of the short they sold and uncertainty over whether the price would continue to increase. If you have to buy by EOD Friday and the price starts skyrocketing Thursday, you might want to buy a little earlier even if it means eating a huge loss, because you don't know if that skyrocket will continue into the next day. e: Why is that downvoted?
  - desertrider12 6y ago
    Shorts aren't options, they don't have expiration dates. You can hold a short indefinitely just by paying interest on the borrowed share value when you entered the position. You can even keep the short from being forcibly closed during a squeeze by providing more collateral. Put options do expire, but the worst case for puts is that they expire worthless. Regular shorts can have unbounded losses. https://www.investopedia.com/ask/answers/05/shortmarginrequirements.asp https://www.investopedia.com/ask/answers/05/shortmarginrequi...
    - whimsicalism 6y ago
      Sorry I misspoke. Melvin Capital's short position was in the form of puts, I think. Since they would expire worthless, better to sell them when it is skyrocketing than to wait and see it skyrocket further and lose all of your money.
      - harambae 6y ago
        >Melvin Capital's short position was in the form of puts, I think. This is incorrect.
        whimsicalism 6y ago
        Source? Here's mine [0] [1]: https://www.institutionalinvestor.com/article/b1q8swwwtgr7nt/Buried-in-Reddit-the-Seeds-of-Melvin-Capital-s-Crisis https://www.institutionalinvestor.com/article/b1q8swwwtgr7nt...
        projektfu 6y ago
        "Melvin’s most recent filing showed that it held 5.4 million puts on GameStop, valued at more than $55 million — an increase of 58 percent during the third quarter." If it were just puts, then their exposure to a run-up would have been 55 million, not billions. Puts can only go to zero. The filing merely hinted that they were shorting the stock because they also had some puts on it. Think about it, if you buy a $9 put for $10, the most you could lose is $10 when the stock goes way above $9. The unlimited loss scenario with options is writing (selling) a naked call, where you receive a premium but if the stock price rises above the strike price your loss rises. Melvin's position must have been mostly short equity. Perhaps only a few million shares of a $3 stock.
        harambae 6y ago
        https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddi... You don't need an "emergency infusion of 3 billion dollars" if you just bought put options that are now deep OTM. As you mentioned, the total downside is capped at 100%. They clearly had real exposure and serious panic. If they were using put options they were leveraged or had non-standard terms (not the same as typical retail investors)
    - Leherenn 6y ago
      I have to admit I'm missing something in this story. If the shorts do not have to sell, what's the endgame for WSB? Is it just the margin requirements will be too high, thus forcing lots of them to close their position? I see lots of references to the short squeeze happening tomorrow, so there must be something that force people to settle their position tomorrow?
    - notSupplied 6y ago
      What happens when the party you borrowed the stock from, seeing the new high price, wants to sell it to cash in on the fever? Can they not force close the position if the price moved up by some threshold?
  - ROARosen 6y ago
    The other commenter is right that shorts have unlimited risk, and put option are defined, but they can technically be short by selling calls which would make them expire-able. But honestly I doubt it was even possible to be short so much with options alone on such a low cap company (as it was before this blew up)
    - whimsicalism 6y ago
      Is it wrong to call selling calls short selling? Regardless, I think it was puts that they were buying (so sorta the contrapositive).
  - tartoran 6y ago
    I don’t buy it. They’d try some tricks before capitulating. And look, it worked. Since RH stop allowing buys the price went down
whimsicalism 6y ago
> They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it. There is no ambiguity in what "closing the position" means. Stating on CNBC that you have closed the position when in fact you only bought shares to cover 1% of your short would put you in jail. Your mental model for how the world works is wrong.
- stdgy 6y ago
  Serious question: Has anyone ever been jailed for publicly saying they've closed a short position but not actually closing it all? Is it equally illegal to say on CNBC that you closed it out, but to email your investors and tell them you didn't? Is the legal issue that you're misleading your investors or that you're manipulating the market? Both?
  - ziml77 6y ago
    The thing the SEC is going to take issue with is lying to investors. Investors have a right to know what's going on with their money. And despite how it seems from outside Wall Street, hedge funds are definitely scared of the SEC. Banks worry less because their money is sourced differently. Hedge funds have to worry about legal action not just for the fines but also for scaring their investors. When individual investors are so large it only takes a few redemptions to significantly impact AUM.
- deleted 6y ago
  [deleted]
- Avalaxy 6y ago
  The same way that tweeting "funding secured" puts you in jail?
  - TuringNYC 6y ago
    Recall that when that was said, it was being said by an executive and director of a public company.

They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it.

by tsdlts 6y ago

They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it.

tartoran 6y ago

How likely is it for them to close their position when the price hit so high? That would be a huge loss. Why not wait a bit, make a few desperate phone calls and leverage their power before that?

whimsicalism 6y ago
Because of the expiration date of the short they sold and uncertainty over whether the price would continue to increase. If you have to buy by EOD Friday and the price starts skyrocketing Thursday, you might want to buy a little earlier even if it means eating a huge loss, because you don't know if that skyrocket will continue into the next day. e: Why is that downvoted?
- desertrider12 6y ago
  Shorts aren't options, they don't have expiration dates. You can hold a short indefinitely just by paying interest on the borrowed share value when you entered the position. You can even keep the short from being forcibly closed during a squeeze by providing more collateral. Put options do expire, but the worst case for puts is that they expire worthless. Regular shorts can have unbounded losses. https://www.investopedia.com/ask/answers/05/shortmarginrequirements.asp https://www.investopedia.com/ask/answers/05/shortmarginrequi...
  - whimsicalism 6y ago
    Sorry I misspoke. Melvin Capital's short position was in the form of puts, I think. Since they would expire worthless, better to sell them when it is skyrocketing than to wait and see it skyrocket further and lose all of your money.
    - harambae 6y ago
      >Melvin Capital's short position was in the form of puts, I think. This is incorrect.
      - whimsicalism 6y ago
        Source? Here's mine [0] [1]: https://www.institutionalinvestor.com/article/b1q8swwwtgr7nt/Buried-in-Reddit-the-Seeds-of-Melvin-Capital-s-Crisis https://www.institutionalinvestor.com/article/b1q8swwwtgr7nt...
        projektfu 6y ago
        "Melvin’s most recent filing showed that it held 5.4 million puts on GameStop, valued at more than $55 million — an increase of 58 percent during the third quarter." If it were just puts, then their exposure to a run-up would have been 55 million, not billions. Puts can only go to zero. The filing merely hinted that they were shorting the stock because they also had some puts on it. Think about it, if you buy a $9 put for $10, the most you could lose is $10 when the stock goes way above $9. The unlimited loss scenario with options is writing (selling) a naked call, where you receive a premium but if the stock price rises above the strike price your loss rises. Melvin's position must have been mostly short equity. Perhaps only a few million shares of a $3 stock.
        harambae 6y ago
        https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddit-board-melvin-capital-closed-out-of-gamestop-short-position-tuesday.html https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddi... You don't need an "emergency infusion of 3 billion dollars" if you just bought put options that are now deep OTM. As you mentioned, the total downside is capped at 100%. They clearly had real exposure and serious panic. If they were using put options they were leveraged or had non-standard terms (not the same as typical retail investors)
  - Leherenn 6y ago
    I have to admit I'm missing something in this story. If the shorts do not have to sell, what's the endgame for WSB? Is it just the margin requirements will be too high, thus forcing lots of them to close their position? I see lots of references to the short squeeze happening tomorrow, so there must be something that force people to settle their position tomorrow?
  - notSupplied 6y ago
    What happens when the party you borrowed the stock from, seeing the new high price, wants to sell it to cash in on the fever? Can they not force close the position if the price moved up by some threshold?
- ROARosen 6y ago
  The other commenter is right that shorts have unlimited risk, and put option are defined, but they can technically be short by selling calls which would make them expire-able. But honestly I doubt it was even possible to be short so much with options alone on such a low cap company (as it was before this blew up)
  - whimsicalism 6y ago
    Is it wrong to call selling calls short selling? Regardless, I think it was puts that they were buying (so sorta the contrapositive).
- tartoran 6y ago
  I don’t buy it. They’d try some tricks before capitulating. And look, it worked. Since RH stop allowing buys the price went down

whimsicalism 6y ago

> They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it. There is no ambiguity in what "closing the position" means. Stating on CNBC that you have closed the position when in fact you only bought shares to cover 1% of your short would put you in jail. Your mental model for how the world works is wrong.

stdgy 6y ago
Serious question: Has anyone ever been jailed for publicly saying they've closed a short position but not actually closing it all? Is it equally illegal to say on CNBC that you closed it out, but to email your investors and tell them you didn't? Is the legal issue that you're misleading your investors or that you're manipulating the market? Both?
- ziml77 6y ago
  The thing the SEC is going to take issue with is lying to investors. Investors have a right to know what's going on with their money. And despite how it seems from outside Wall Street, hedge funds are definitely scared of the SEC. Banks worry less because their money is sourced differently. Hedge funds have to worry about legal action not just for the fines but also for scaring their investors. When individual investors are so large it only takes a few redemptions to significantly impact AUM.
deleted 6y ago
[deleted]
Avalaxy 6y ago
The same way that tweeting "funding secured" puts you in jail?
- TuringNYC 6y ago
  Recall that when that was said, it was being said by an executive and director of a public company.