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Articles like these are cheap clickbait. Most short interest in Nvidia are hedges. Nvidia shareholders are sitting on huge untaxed gains. People want to sell bu

by gizmo 2y ago

Articles like these are cheap clickbait. Most short interest in Nvidia are hedges. Nvidia shareholders are sitting on huge untaxed gains. People want to sell but can’t because January is still 6 months away. So they hedge with puts. And market makers then have to short the stock in order to stay market neutral. Everybody and their dog is long nvidia.

_yb2s 2y ago
I don't have a great understanding of how all of these options for betting against something work, but in practice betting against anything seems too risky even if you are 100% sure it will fail, because you also need to know exactly when it will fail, and the longer out you think it will be the less you stand to make and the more risk. Even the most overpriced or poorly ran companies are never going to fail on a predictable timeline. It's pretty obvious TSLA is massively overvalued... but will it crash this month? next year? 20 years from now? who knows.
- gizmo 2y ago
  If it’s cheaper to hedge (by shorting) and waiting for the long term cap gains tax instead of selling (and paying short term cap gains) that’s what people will do. It has nothing to do with “risky bets” or anything like that. It’s simple tax optimization.
- ptsneves 2y ago
  You don’t know much but you know enough. Options is all about timing. And nobody knows the time to short for sure. The market is not rational.
- TeaBrain 2y ago
  With a put option hedge, they are not necessarily betting that it will fail and often are not betting that it will fail. Unlike just borrowing shares to short, someone with a put option, but who is long in the stock, will have a fixed loss on the option if the stock doesn't fall. They buy a put option to protect the possible downside of their long position, with a fixed loss in the case of the stock not falling, while if the stock does fall, they'll be able to recoup some of their losses from the fall in value of their long position.
mancerayder 2y ago
You mean they're selling puts at the share price they're okay losing the stock at? What's that have to do with taxes (and wanting to hold 12 months+)?
- ptsneves 2y ago
  If they are selling puts they are actually signalling the price they are ok to buy at. What you described is selling a call. Or to be annoying selling a right to buy.
- gizmo 2y ago
  Equity holder buys puts as a hedge from a market maker. Market maker sells puts and shorts shares to stay market (delta) neutral. The equity holder could also just sell their shares instead of hedging with puts, but that's a taxable event. Hedging with puts is not. Think of it this way. You have nvidia shares, think the stock has ran up too quickly, want to sell, but also don't want to because of taxes. So you approach your neighbor and get him to short nvidia for you, and you agree to pay your neighbor a fixed amount for his trouble and your neighbor passes the money made/lost by shorting back to you. Now your effective share count is 0 and you don't have to pay taxes on unrealized gains. The point is that people wrongly assume that short interest in nvidia must mean people are betting against nvidia, when it's much more likely most short interest belongs to people who are bullish.

by gizmo 2y ago

_yb2s 2y ago

I don't have a great understanding of how all of these options for betting against something work, but in practice betting against anything seems too risky even if you are 100% sure it will fail, because you also need to know exactly when it will fail, and the longer out you think it will be the less you stand to make and the more risk. Even the most overpriced or poorly ran companies are never going to fail on a predictable timeline. It's pretty obvious TSLA is massively overvalued... but will it crash this month? next year? 20 years from now? who knows.

gizmo 2y ago
If it’s cheaper to hedge (by shorting) and waiting for the long term cap gains tax instead of selling (and paying short term cap gains) that’s what people will do. It has nothing to do with “risky bets” or anything like that. It’s simple tax optimization.
ptsneves 2y ago
You don’t know much but you know enough. Options is all about timing. And nobody knows the time to short for sure. The market is not rational.
TeaBrain 2y ago
With a put option hedge, they are not necessarily betting that it will fail and often are not betting that it will fail. Unlike just borrowing shares to short, someone with a put option, but who is long in the stock, will have a fixed loss on the option if the stock doesn't fall. They buy a put option to protect the possible downside of their long position, with a fixed loss in the case of the stock not falling, while if the stock does fall, they'll be able to recoup some of their losses from the fall in value of their long position.

mancerayder 2y ago

You mean they're selling puts at the share price they're okay losing the stock at? What's that have to do with taxes (and wanting to hold 12 months+)?

ptsneves 2y ago
If they are selling puts they are actually signalling the price they are ok to buy at. What you described is selling a call. Or to be annoying selling a right to buy.
gizmo 2y ago
Equity holder buys puts as a hedge from a market maker. Market maker sells puts and shorts shares to stay market (delta) neutral. The equity holder could also just sell their shares instead of hedging with puts, but that's a taxable event. Hedging with puts is not. Think of it this way. You have nvidia shares, think the stock has ran up too quickly, want to sell, but also don't want to because of taxes. So you approach your neighbor and get him to short nvidia for you, and you agree to pay your neighbor a fixed amount for his trouble and your neighbor passes the money made/lost by shorting back to you. Now your effective share count is 0 and you don't have to pay taxes on unrealized gains. The point is that people wrongly assume that short interest in nvidia must mean people are betting against nvidia, when it's much more likely most short interest belongs to people who are bullish.