I'd expect this on stocktwits, but not here.
For other readers, I need to point out that I disagree with your conclusions, though you have many correct statements in your post.
I'm not going to go through detailed response, it's not worth my time, and I doubt it's worth your time either. I'll just point out one wrong assumption, there is NO way retail buy and retail sell of options is even remotely balanced - MMs are net sellers.
They're paid for that mainly by the value of theta decay. As a result, a *spike* in the demand for puts *still* causes a spike in the bids and ask prices which market makers ask for puts -- otherwise they end up unbalanced, the theta decay not compensating for the tail risk exposure. ("More unbalanced than they wanted to be", if you prefer.)
Following logical consequences from that fact, and need for MM to balance positions, will land you in different model than one you described. Definition of 'vega' is another point that explains your concerns 500 vs 200
Uh, no, it doesn't, not even slightly. Your handwaving doesn't make it true. Seriously, I'm capable of constructing a hedge against almost anything, and proper hedging is a lot more complicated than that. If TSLA drops to $50 and the market maker is a net seller of $250 put strikes, the market maker takes a loss of $200/share on those strikes (less whatever they originally got). If the market maker has "hedged" by short-selling only 200 shares, the market maker still takes a loss of 3/5 of that amount, which, if he sold *enough* options, is going to be large enough to get him in trouble with his boss for not being neutral.
I think I may have found the source of your confusion. You're just thinking of *small* options trades. I'm talking about *big* options trades, because that was the topic of your original theory. After a certain volume, unlike an ordinary investor, the market marker has no guarantee of *ever* being able to get out of the trade and ends up fully exposed to the extreme cases.
Your initial theory was that the increase in short interest (without an increase in interest rates charged), which is measured in
hundreds of thousands of shares per day, was largely due to market makers. Your theory was that they were short-selling to hedge against puts they've sold. It is true that market-makers are allowed to short-sell and given longer to find actual shares to borrow than normal investors, so the price to borrow shares wouldn't have gone up immediately (not until they're obliged to rehypothecate in, if I remember, weeks later).
However, this is not a tenable theory. Hundreds of thousands of shares per day corresponds to
thousands of options contracts per day. If the market maker is only doing partial hedges (like short-selling 200 shares against 500 put options sold) it would correspond to even
more options contracts.
(1) We are not typically seeing that kind of daily options volume, or that kind of daily increase in Open Interest
(2) If we were seeing that kind of retail options put purchases, and they were not balanced by retail options sales, the market makers can and would be raising the prices charged for the puts -- with higher demand, no added retail supply to push down prices, they'll supply more *at a higher price*. And they're simply not doing that right now.
Of course, I suppose it's possible that we'll hear about several TSLA options market makers losing their shirts a few weeks from now, which would lend credence to your theory. I do remember stories of market makers busting due to ill-thought-out poorly hedged trades. Perhaps I am being unfair to the market makers by assuming that they are not putting themselves in an idiotically dangerous position with no compensation.
Bluntly, the increase in short interest (without an increase in interest rates charged) is due to *real* shorts (not market makers). The reason the interest rate isn't rising is that more shares are available to the brokers without paying interest. This is probably due to more bulls borrowing on margin than before. That's the most parsimonious explanation.
