The Rolling Naked Tesla Short

[luvb2b]

there's a pattern of trading which indicates a large player is using options to hold on to a rolling naked short position. looks like maybe millions of shares.

since the sec has tightened up their naked short rules it's harder for funds to put on naked shorts. but this guy has figured out a loophole.

what you want to look at is a good trading history of the june 25 calls, the april 35 calls or the april 37 calls. he's most obvious in the june 25 calls, but does come along now and again in the april calls (as he did today in the april 37s).

so this guy, say he wants to short like 500,000 tesla, but he can't find that many shares to borrow. and even if he could, he doesn't want to pay the 80% carrying charge (see my other post).

so instead what he does is pre-arrange a trade with a market maker where he sells a huge number of deep in the money calls at a discount to intrinsic value. like for example today he sold 2800 of the april 37 calls. when the stock was above 44, he sold a bunch of the 37 calls at $7. this particular guy always does the trades on the psx.

the market maker on the other side is happy to buy them because the market maker hedges by shorting tesla above 44 ahead of the trade, and then immediately exercises the calls to neutralize the market maker's position.

the reason you know this is happening is because the open interest doesn't change. the june 25's this has happened every few days for a couple weeks now. you'll see today 2,200 of the june 25 calls traded. watch tomorrow the open interest won't change. if the calls weren't getting exercised, the open interest would have to increase. it never does on these trades.

so anyway, the market maker exercises the calls. now what happens is the shorter goes into the exercise pool and gets assigned on most or all of the calls. tomorrow his position will show that he's short 500,000 tesla shares.

now he's got 3 days to locate the shares (t+3 settlement). he won't pay carrying charges until settlement. but the trade will never settle because he can't find the shares and again, he doesn't want to pay the carrying charge.

so a couple days later, he has to buy back the shares and repeat the options trade. the shares he naked shorted would probably show up on the fails-to-deliver data, but since he covers them they won't do a buy in.

i'm pretty sure this is illegal, and whoever is facilitating this trade is likely also committing a crime.

i'm highlighting this just to show how desperately the shorts are trying to hang on to their positions. paying 85% carrying charges, finding clever ways to short naked, etc. these are all signs of sheer desperation and i kinda think these guys will get forced out of their positions before this up-move has ended.

--- added

wow just seeing today this guy is doing huge size... oh my god... over 1.5 million shares i didn't even get into the out months (like june 25's). who is this guy i wonder? every trade on the psx...

apr 35 calls qty 2000: [email protected] / [email protected] / [email protected] / 500@9 / 500@9 - times 10:45-10:51a est
apr 36 calls qty 2400: [email protected] / [email protected] / [email protected] / 600@8 / 600@8 - times 10:45-10:50a est
apr 37 calls qty 2800: [email protected] / [email protected] / [email protected] / 700@7 / 700@7 - times 10:46-10:50a est
apr 38 calls qty 6200: [email protected] / [email protected] / [email protected] - times 10:50-10:51a est.
apr 39 calls qty 3000: [email protected] / [email protected] / [email protected] - times 10:51a est
jun 25 calls qty 2200: [email protected] / [email protected] / [email protected] / [email protected] - times 10:54a est
jun 33 calls qty 1200: [email protected] / [email protected] / [email protected] - times 9:57-9:58a est
jun 35 calls qty 3200: [email protected] / [email protected] / [email protected] - times 9:56-9:57a est

total contracts: 23,100 = 2,310,000 shares, representing about 2% of the company. that's a monster position.

we know these aren't rolls or spreads because the open interest is too low. no one has this many contracts to close so they must be new opening positions. important to note as if tomorrow the open interest doesn't change much you'll know all these options were exercised.

apr 35 calls oi 478
apr 36 calls oi 599
apr 37 calls oi 728
apr 38 calls oi 3147
apr 39 calls oi 1538
jun 25 calls oi 543
jun 33 calls oi 574
jun 35 calls oi 1608

 

[Johan]

If you are right then yes this is illegal and whichever market maker is in on it will be in trouble. Amazing that you've found this pattern. This coupled with your great in-depth analyzis in the last few weeks makes me want to ask: Can I (please) mirror your portfolio?

 

[Nicu.Mihalache]

luvb2b, thanks for sharing your insight

if Elon's trilogy tonight is just about SC at restaurants and a cash infusion in any form to finance that, I think shorts will get an easy out tomorrow - I really hope it's not (only) that because I am still very long TSLA (but sold a few Apr. $44 calls 30 min ago in the neighborhood of $2 - bought last week at 5c each )

 

[luvb2b]

this guy can mess around in regular hours trading, but in after hours there is no options market. the stock will be free to roam. with this kind of activity i would suspect he can hold it down intraday but the gaps will be murder.

 

[luvb2b]

Fails-to-Deliver Data confirming naked shorts

the sec fails to deliver data for the first half of march is out, and you can see the naked shorting is starting to show up here. i'll post an update with the updated open interest in the options i highlighted yesterday. i fully expect to see very little in terms of changes.

SETTLEMENT SYMBOL QUANTITY (FAILS) DESCRIPTION PRICE
20130301 TSLA 252,996 TESLA MTRS INC COM STK (DE) 34.83
20130304 TSLA 290,744 TESLA MTRS INC COM STK (DE) 34.65
20130305 TSLA 192,257 TESLA MTRS INC COM STK (DE) 35.58
20130306 TSLA 90,868 TESLA MTRS INC COM STK (DE) 36.65
20130307 TSLA 159,159 TESLA MTRS INC COM STK (DE) 37.69
20130308 TSLA 166,030 TESLA MTRS INC COM STK (DE) 38.23
20130311 TSLA 113,858 TESLA MTRS INC COM STK (DE) 38.47
20130312 TSLA 88,255 TESLA MTRS INC COM STK (DE) 39.1
20130313 TSLA 64,112 TESLA MTRS INC COM STK (DE) 39.12
20130314 TSLA 73,235 TESLA MTRS INC COM STK (DE) 38.98

 

[luvb2b]

here are the updates to open interest. recall the huge size that traded in the deep in the money options yesterday? we would expect that to show as open interest today, assuming all the options had not been exercised.

here are the suspicious trades from yesterday april 2, 2013. all of them were on the psx. i threw out the june 35 calls as the exchange confirmed it's a bad print.
apr 35 calls qty 2000: [email protected] / [email protected] / [email protected] / 500@9 / 500@9 - times 10:45-10:51a est
apr 36 calls qty 2400: [email protected] / [email protected] / [email protected] / 600@8 / 600@8 - times 10:45-10:50a est
apr 37 calls qty 2800: [email protected] / [email protected] / [email protected] / 700@7 / 700@7 - times 10:46-10:50a est
apr 38 calls qty 6200: [email protected] / [email protected] / [email protected] - times 10:50-10:51a est.
apr 39 calls qty 3000: [email protected] / [email protected] / [email protected] - times 10:51a est
jun 25 calls qty 2200: [email protected] / [email protected] / [email protected] / [email protected] - times 10:54a est
jun 33 calls qty 1200: [email protected] / [email protected] / [email protected] - times 9:57-9:58a est

total contracts: 21,900 representing 2.19 million shares of tesla valued at around $90 million.

here's the open interest yesterday with --> indicating the open interest today. notice how none of the contracts show an increase in open interest that even remotely resembles the volume traded in that contract?
apr 35 calls oi 478 --> 169 today
apr 36 calls oi 599 --> 245 today
apr 37 calls oi 728 --> 419 today
apr 38 calls oi 3147 --> 1497 today
apr 39 calls oi 1538 --> 1376 today
jun 25 calls oi 543 --> 542 today
jun 33 calls oi 574 --> 380 today

 

[Martini]

Every time I think I might dabble in options trading, I read a post like this and realise that I have no idea what I am doing. Back in the mattress you go, retirement fund!

 

[Teslawisher]

Every time I think I might dabble in options trading, I read a post like this and realise that I have no idea what I am doing. Back in the mattress you go, retirement fund!

Right there with ya!

 

[SebastianR]

here are the updates to open interest. recall the huge size that traded in the deep in the money options yesterday? we would expect that to show as open interest today, assuming all the options had not been exercised.

Very interesting indeed. Now who do you think is doing such a thing?

 

[luvb2b]

imo has to be a large hedge fund. yesterday those options account for 1/3rd of tesla's volume. the notional value of that position is $100 million. it's not a retail investor.

the sophisticated nature of the trade plus the fact that it requires cooperation from a market maker to implement also point to a hedge fund suspect.

today he is back at it, check the trades in the june 32 and 33 calls. 1400 contracts each. i'll note the open interest and the trades later today and you'll see again tomorrow, the options he traded will never show up in the open interest.

if my theory is correct, the behavior is illegal. this trader is effectively shorting with no intent of ever delivering shares. the market maker helping him also would be running afoul of sec rules.

it's going to continue until some regulator is alerted and checks out what's going on. i'd call tesla i.r. but they don't have a phone number.

 

[v12 to 12v]

Just call Tesla's HQ and ask for ir.

 

[luvb2b]

i guess i would be more aggressive contacting tesla but the last thing i want to see is tesla get involved in a fight with short sellers.

elon can be a bit of a hothead and i could see where he would get pissed off if he knew naked shorting was going on. the last thing i want to see as a shareholder is the ceo/company fighting shorts. every company i've seen that has fought shorts has always been a disaster to own.

 

[mitch672]

i guess i would be more aggressive contacting tesla but the last thing i want to see is tesla get involved in a fight with short sellers.

elon can be a bit of a hothead and i could see where he would get pissed off if he knew naked shorting was going on. the last thing i want to see as a shareholder is the ceo/company fighting shorts. every company i've seen that has fought shorts has always been a disaster to own.

I agree, but if there is illegal activity going on, the hedge fund and market maker should be disciplined.
The SEC doesn't have the resources to find all violations on their own, I'm sure you could report it anonymously to their enforcement people. Tesla doesn't need to be involved (and probably shouldn't be)

Stocks being manipulated like this realy irks me.

 

[luvb2b]

i contacted them already. there's just so few staff, so many complaints, and this thing is pretty darn complicated. the sec will need a push in the right direction to get it figured out. imo the best hope is a wsj or barron's heist of my research and some good investigative reporter digging into it to get to the bottom of what's going on.

it's always possible that i'm wrong. but i have been over this pattern a few times now and talked it over with the occ and several options desks, and they all agree the pattern points to the behavior i am suggesting. the high cost of shorting. lack of shares to borrow, and near zero time premium in deep in the money calls all drives this activity.

here's an excerpted discussion from this barron's article:
http://online.barrons.com/article/S...577518792352585660.html#articleTabs_article=2
"NEGATIVE" IS SHORT for "negative rebate." For most stocks, professional short sellers get a rebate on part of the fee they pay the prime broker for borrowing stock for them. But when the stock is in short supply and tough to borrow (often because many people are shorting it), as Overstock's was for years, the shorts pay a premium, called the negative rebate, to the broker. It can bring the total fee up to 35% of the share price. Thus, if a stock were trading at $10, it would have to fall below $6.50 before a short sale turned profitable.

A 35% fee is steep, and it's even steeper if the prime brokers didn't actually borrow the stock. The possibility of this happening was discussed in a deposition taken in the suit by Marc Cohodes, a short seller whose $1.5 billion hedge fund, Copper River Partners, was a Goldman client.

In the portion of his deposition quoted in the released filing, Cohodes questions whether Goldman had borrowed the Overstock shares his firm was shorting, and alleges that Goldman later helped put his fund out of business to hide improper conduct. Cohodes wouldn't speak with Barron's; Goldman denies his allegation.

In another e-mail, a Goldman hedge-fund client remarks that his firm would ask "to short an impossible name, expecting full well not to receive it and [be] shocked to learn that [Goldman's representative] can get it for us."

Where would such hard-to-get inventory come from? Read in conjunction with subsequent regulatory actions against options market-makers, the Overstock brief appears to indicate that Goldman and Merrill got it from options traders that used a complicated trading technique called a reverse conversion (not in itself illegal) and involving naked short sales and puts and calls, to create fictitious shares.

One of these market makers, SBA Trading, was run by a trader named Scott Arenstein until the American Stock Exchange shut it in 2007. Without admitting or denying guilt, Arenstein and his firm settled Amex charges of Regulation SHO violations by agreeing to pay $5 million in penalties and accepting being barred from the securities industry for five years. According to the Amex disciplinary decision, Arenstein had shorted stocks and then failed to deliver them.

 

[qwk]

i guess i would be more aggressive contacting tesla but the last thing i want to see is tesla get involved in a fight with short sellers.

elon can be a bit of a hothead and i could see where he would get pissed off if he knew naked shorting was going on. the last thing i want to see as a shareholder is the ceo/company fighting shorts. every company i've seen that has fought shorts has always been a disaster to own.

I'm sure that since you posted this here, word will get back to Elon pretty quickly. This forum is monitored very heavily by Tesla.

- - - Updated - - -

Stocks being manipulated like this realy irks me.

Welcome to the stock market. The SEC does very little, and thus the illegal activities and corruption are very widespread.

 

[avatar]

Wow. This is incredible.

Can one of the mods change the title of this thread to something that calls out that we think illegal activity is going on? We need to shout so that TSLA management is aware of this and brings regulators in.

 

[luvb2b]

i'm a firm believer that markets can only be manipulated for short periods of time. as i mentioned in another thread, all my research points to substantial revenue and earnings beats this quarter.

it seems like the majority of people don't understand it at all. and i guess the shorts are part of that group.

i bitch and moan about shorts, but it's as much about understanding the daily trading dynamic as anything else. all i really want is tesla to put some good earnings numbers and show us margins are going increasingly towards 25% without credits and the share price will take care of itself.

yeah, that guy shorted 2+ million shares yesterday... but guess what? that means there were $100m worth of buyers around to take the other side. people want an excuse to own tesla, and the best excuse is profits.

 

[ElSupreme]

Wow. This is incredible.

Can one of the mods change the title of this thread to something that calls out that we think illegal activity is going on? We need to shout so that TSLA management is aware of this and brings regulators in.

I think the 'Naked Tesla Short' will get someone's attention.

At least the 'Naked' part will.

 

[avatar]

I am a little in awe reading your analysis. What is your day job if you don't mind telling us?

 

[luvb2b]

lol puhhhleeeze. i have a significant position in tesla. with a lot of my eggs in this basket, let's just say i watch the basket carefully.

and keep in mind that i might be wrong about the whole thing. for me, the trading pattern and surrounding facts point to the conclusion i put forth. but that doesn't mean there isn't another logical explanation i don't know.

imo this is a matter that should be handled quietly by the regulators. i don't want to see tesla become the next overstock.com.

it is interesting to follow because you get an idea of how desperate the shorts have become to find ways to stay short or hang on to their positions, even when shares aren't available and costs are so high. if tesla is the real deal, this guy is going to get buried, along with all the non-naked shorts who are paying 10c a day for the privilege of staying short.

you guys watch sports at all? for example basketball... is it better to get obsessed with the referees policing the other team's tactics - pulling jerseys or hard picks etc. - or is it better to understand how the other team plays and the way the refs are calling the game and then play accordingly? i say the latter. the refs will referee. the dirty players will be dirty. that's life.

i already mentioned the fouls to the referees once, and now i'm just trying to understand my opponent and figure out how to play my game to win.