The Rolling Naked Tesla Short

[K Hall]

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.

Andrew Carnage....I love that quote.

 

[EarlyAdopter]

Is there anything one could do to counter or thwart the trade? Get in between the bids and market maker for instance.

 

[luvb2b]

Is there anything one could do to counter or thwart the trade? Get in between the bids and market maker for instance.

the guy moved $100 million of shares like this in a day. he's a steamroller. i'm an ant. no thank you.

these trades are probably being executed off the floor of the exchange anyway, so not much can be done about it.

 

[v12 to 12v]

Andrew Carnage....I love that quote.

Freudian slip?

 

[hcsharp]

Did you see this in the Wed. Seeking Alpha Options Brief?

Tesla Motors, Inc. - Bearish options are changing hands on Model S producer, ...
... Options on the stock are more active than usual, with overall volume in excess of 26,000 contracts at midday versus average daily volume of 19,300 contracts. Sizable prints in June expiry put options suggests one strategist may be bracing for further declines in the price of Tesla's shares during the next couple of months. It looks like the trader purchased a 4,500-lot Jun. $30/$35 put spread at a net premium of $1.40 each. The strategy makes money if shares in TSLA drop 18% to trade below the breakeven point at $33.60, with maximum potential profits of $3.60 per contract available given a more than 25% pullback in the price of the underlying to $30.00 by June expiration. We note that open interest in the $30 strike puts is substantial, indicating the strategist could be rolling an existing put position up to the $35 striking price. If this is the case, profits to the downside are not capped beneath the $30.00 level.

 

[luvb2b]

most of the time these analysts have no idea what's going on. the details of the report are accurate but very incomplete.

the guy put this trade on around 10:04a est yesterday (4/3). it was part of a combination of closing out 5000 of the april 40/45 call spreads the guy had put on a few days ago. look at the prints on a chart you'll see what i mean. as far as options volume being high, this one player accounts for 19,000 of the contracts traded yesterday, and they are relatively small money trades as you'll see below.

whoever did these trades is most probably a short, and from the looks of things a complete moron who got lucky because of the earnings announcement.

the reason i know that is that when he put on the april 40/45 call spread a few days back (maybe 3/28?), he did the april 40 calls for about 55-60c and sold the april 45s for 3c. i'm saying that from memory of seeing it.

that's just stupid. who cares about the 3c? just leave the upside open. it would cost him probably 1/4-1/2c in commissions for that leg, and another 1/4-1/2c to close it out. so at the end he's hardly even going to make 2c ($10,000) by selling the april 45s. as it was his april 45s screwed him big time because they ended up becoming 50 baggers at the highs and kept him from easily unloading his entire position.

but this guy never really wanted to be long, he was most likely just hedging his short position or trying to find a place to get short. so what does he do?

he does a spread trade, simultaneously closing out 5000 of his april 40/45 call spreads, and then opening 4500 of the jun 35/30 put spreads at 10:04a est, moments before the stock broke to the morning lows at $40.62. the combination of these two trades would have resulted in delta hedging selling of roughly 250,000-300,000 shares, which is part of why the initial morning spike down was so severe.

i'd write the report as "size players betting against tesla were closing out long tesla hedges and initiating new short positions near the lows today. with the stock $10% higher a day ago, what were these people doing then? is the announcement of leasing so negative that it should warrant getting scared out and shorting 10% below yesterday's price, which was primarily driven by report of a positive earnings surprise?

as for this being a "large bet"... it's not really that big. the trader started with less than $300k in the trade when he did the 40/45 call spread, and then by taking profits on that side and putting on the 35/30 puts he cashed out around 1/3rd of that. so in the end, does a $200,000 trade even warrant this much discussion?

i posted somewhere else, understanding these things is just part of understanding my opponents. my confidence is usually increased when i see someone doing something this stupid. yes he made money, but he basically just lucked out because tesla gave him an upside earnings surprise

 

[DonPedro]

It was the butler who did it

 

[luvb2b]

April 3rd update

updating trades from yesterday below. another interesting pattern is i notice our friend is doing these trades about every 5 business days. the jun 25 calls have been his favorite for those who want to see it, just pull up the price/volume/open interest chart.

march 5th, march 12th, march 19th, march 25th, and april 2nd are his trade dates. he usually does his thing before 1pm est.

will try to keep a diary for reference for a few days.

here are the suspicious trades from yesterday april 3, 2013. all of them were on the psx.
jun 32 calls qty 1400: [email protected] / [email protected] / [email protected] / [email protected] times 10:25-10:26a est, 10:59a est
jun 33 calls qty 1400: [email protected] / [email protected] / [email protected] / [email protected] times 10:26-10:30a est, 10:59-11:00a est

here's the open interest yesterday with --> indicating the open interest today.
jun 32 calls oi 341 --> 341 today
jun 33 calls oi 380 --> 380 today

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: 19,800 representing 1.98 million shares of tesla valued at around $90 million.

here's the open interest yesterday with --> indicating the open interest today.
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

 

[jeff_adams]

Stupid noob question.

Besides hedge fund guy trying to hold his short position and not take a financial bath doing it, what damage is he doing to the stock and long investors? Does the high stock trade volumes signal stock volatility? He's cheating the system for his own gain, but who is losing money because if it?

 

[kenliles]

Is there anything one could do to counter or thwart the trade? Get in between the bids and market maker for instance.

Not if the Market Maker and the Fund-Trader are one in the same

- - - Updated - - -

Stupid noob question.

Besides hedge fund guy trying to hold his short position and not take a financial bath doing it, what damage is he doing to the stock and long investors? Does the high stock trade volumes signal stock volatility? He's cheating the system for his own gain, but who is losing money because if it?

on the good side- it cuts the call time premium if you're on the buy side; doesn't look like we're getting much pullback buying opportunity though

 

[luvb2b]

Besides hedge fund guy trying to hold his short position and not take a financial bath doing it, what damage is he doing to the stock and long investors? Does the high stock trade volumes signal stock volatility? He's cheating the system for his own gain, but who is losing money because if it?

several things happen that are damaging:

first, he is robbing the people who are buying and expecting to get delivery of good shares. the trades are being executed with no intent to ever deliver shares against them. it's happening indirectly because it's the market maker who is getting the naked short put on for him, and the position gets transferred by the same day option exercise. the end result is it is just as if this player sold the shares naked short.

second, he is robbing the people who are long and able to earn money loaning out there shares. by circumventing the system he avoids paying the short charge.

third, by supplying the market with phony shares he is depressing the price level below where it would otherwise be with only legitimate longs and shorts.

finally, he is exaggerating volume and volatility in the stock. unless he is in cahoots with the market maker, his position has to get bought in every 5 days or so: if he trades today, he's assigned on the options and short tomorrow, supposed to deliver shares 3 days later, and supposed to be bought in next day if he can't deliver so that's five days i think). i suspect he would time his buy-in coincident with when he's shorting those options to minimize price impact. this last part is the thing i have the hardest time with. how exactly does he keep rolling this naked short along? sec rules would require a buy-in if he can't deliver shares. the buy-in would move the stock higher and wreck his trade. the only way to avoid that is to coordinate the buy-in with the initiation of the options position. as i mentioned a few days back, his activity basically accounted for 1/3rd of the daily share volume on a 6 million share day. almost $100,000,000 of tesla shares that didn't exist to sell or borrow got sold that day - where would the price have been without that? that's pretty significant if you ask me.

 

[kenliles]

...it's happening indirectly because it's the market maker who is getting the naked short put on for him, and the position gets transferred by the same day option exercise. the end result is it is just as if this player sold the shares naked short.

...unless he is in cahoots with the market maker, his position has to get bought in every 5 days or so:

clearly he is the market maker, the trader is in the firm,
either literally or figuratively thru fungible asset

 

[luvb2b]

well looks like he's back. this time he's spreading around in smaller blocks, but same pattern. i wonder if he reads this board or he's noticing someone asking questions.

anyway, so let's note the trades and the corresponding open interest.

here are the suspicious trades from april 5, 2013. once again, all of them were on the psx. look at the times. so close together you know it's the same guy. just spreading across different strikes to hide his footprint.

apr 33 calls qty 500: [email protected] /[email protected] / [email protected] / [email protected] / [email protected] times 12:46-12:47p est, 1:38-1:39p est
apr 34 calls qty 400: [email protected] / 100 @7.20 / [email protected] / [email protected] times 12:47-12:48p est, 1:39p est
apr 35 calls qty 640: [email protected] / [email protected] / [email protected] / [email protected] times 12:47-12:48p est, 1:40-1:41p est
apr 37 calls qty 2000: [email protected] / [email protected] / [email protected] / [email protected] times 12:48p est, 1:40p est
jun 31 calls qty 200: [email protected] / [email protected] / [email protected] / [email protected] 12:49a est, 1:42p est

that represents almost 374,000 shares on a day where the day's volume is just 1.6 million. almost 25% of the daily share volume. pretty big again.

here's the open interest will update later how it changed
apr 33 calls oi 76
apr 34 calls oi 78
apr 35 calls oi 159
apr 37 calls oi 513
jun 31 calls oi 43


here are the suspicious trades from yesterday april 3, 2013. all of them were on the psx.
jun 32 calls qty 1400: [email protected] / [email protected] / [email protected] / [email protected] times 10:25-10:26a est, 10:59a est
jun 33 calls qty 1400: [email protected] / [email protected] / [email protected] / [email protected] times 10:26-10:30a est, 10:59-11:00a est

here's the open interest yesterday with --> indicating the open interest today.
jun 32 calls oi 341 --> 341 today
jun 33 calls oi 380 --> 380 today


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: 19,800 representing 1.98 million shares of tesla valued at around $90 million.


here's the open interest yesterday with --> indicating the open interest today.
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

 

[avatar]

third, by supplying the market with phony shares he is depressing the price level below where it would otherwise be with only legitimate longs and shorts.

That is a big deal. It is quite incredible that no one is doing anything about it. I am pretty sure Elon would want to expose this guy but I'm not sure if anyone in TSLA management has even noticed this.

 

[luvb2b]

That is a big deal. It is quite incredible that no one is doing anything about it. I am pretty sure Elon would want to expose this guy but I'm not sure if anyone in TSLA management has even noticed this.

first off, who's going to notice? unless you happen to be looking and see this. i saw it purely by accident as the guy did similar trades twice in a week in a expiration/strike i was watching.

second, there's no conclusive proof of what's happening. there's a logical explanation that i put forth, but there may be another logical explanation that we don't know.

third, even if the company knew, having elon involved in something like that would be a total distraction. as i said before, every management that i know that got involved in a fight with short sellers ended up failing their business. if he executes, the stock will rise and this clown will get his head ripped off. i'd rather have elon focus on execution and try to get the regulators do their job.

 

[jeff_adams]

I would agree this is not Elon's fight.

Silly question, but is there an investigative reporter or show on Bloomberg News (or something similar) that might want to score some brownie points on a slow news day? Even if no one is caught, I bet they stop doing it if there is a report of unusual activity on Telsa shorts. Wasn't there a gal named Greta (lawyer) that liked to look into things like this?

 

[renim]

http://online.wsj.com/public/resources/documents/MarkopolosTestimony20090203.pdf

The federal SEC missed Madoff, they will miss this.
refer it to a state level agency.

 

[luvb2b]

updating with open interest today from the suspicious volume options friday. as usual, you can see all the open interests stayed the same or declined from friday to today. the april 33 calls are especially interesting to note, because the open interest starting out was just 76 contracts. with 5 blocks of 100 trading, if there were any offsetting trades you would still expect open interest of 176 contracts or more. with no change, obviously all of the 500 contracts had to be exercised.

followed up calling some desks today, and confirmed that psx is actually the philadelphia stock exchange (i thought maybe it was the pacific which is nyse/arca). if the guy holds true to his pattern he should be back at it tomorrow. that's exactly 1 week from his april 2nd activity.


here are the suspicious trades from april 5, 2013. once again, all of them were on the psx. look at the times. so close together you know it's the same guy. just spreading across different strikes to hide his footprint.

apr 33 calls qty 500: [email protected] /[email protected] / [email protected] / [email protected] / [email protected] times 12:46-12:47p est, 1:38-1:39p est
apr 34 calls qty 400: [email protected] / 100 @7.20 / [email protected] / [email protected] times 12:47-12:48p est, 1:39p est
apr 35 calls qty 640: [email protected] / [email protected] / [email protected] / [email protected] times 12:47-12:48p est, 1:40-1:41p est
apr 37 calls qty 2000: [email protected] / [email protected] / [email protected] / [email protected] times 12:48p est, 1:40p est
jun 31 calls qty 200: [email protected] / [email protected] / [email protected] / [email protected] 12:49a est, 1:42p est

that represents almost 374,000 shares on a day where the day's volume is just 1.6 million. almost 25% of the daily share volume. pretty big again.

here's the open interest on april 5 and how it changed to april 8 (the next trading day)
apr 33 calls oi 76 -> 76
apr 34 calls oi 78 -> 78
apr 35 calls oi 159 -> 157
apr 37 calls oi 513 -> 342
jun 31 calls oi 43 -> 43


here are the suspicious trades from yesterday april 3, 2013. all of them were on the psx.
jun 32 calls qty 1400: [email protected] / [email protected] / [email protected] / [email protected] times 10:25-10:26a est, 10:59a est
jun 33 calls qty 1400: [email protected] / [email protected] / [email protected] / [email protected] times 10:26-10:30a est, 10:59-11:00a est

here's the open interest yesterday with --> indicating the open interest today.
jun 32 calls oi 341 --> 341 today
jun 33 calls oi 380 --> 380 today


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: 19,800 representing 1.98 million shares of tesla valued at around $90 million.


here's the open interest yesterday with --> indicating the open interest today.
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[/QUOTE]

 

[Zzzz...]

1) The guy sells deep in the money calls at a discount to intrinsic value to MM.
2) Market maker shorts Tesla shares to get money.
3) MM exercise calls right away with intention to cover MM's short position when MM get shares back.
4) MM had to wait 3 days caring short position over those days.

Next thing I'm not sure what happens. You say: "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".

So 5) would be guy buying back shares on open market to cover calls he sold to MM? Right?
Then why you say that it would show up in fails-to-deliver data? Have he delivered shares? Have he covered calls he sold? I mean if yes, he effectively shorted position for 3 days and then had to buy them on open market to cover. Or I'm missing something?

And how come you claiming that this scheme somehow is the way to avoid paying short interest? I mean for MM to buy those calls discount to intrinsic value of calls had to be bigger then short interest MM had to pay to carry on short position, right? Or MM would loose money on transaction. So this short in my understanding still paying short interest, but he do it in weird way...

Disclaimer: I do not personally touch option trading, but genuinely interested in how option market works. Excuse me if I misunderstood of whats going on.

 

[luvb2b]

1) The guy sells deep in the money calls at a discount to intrinsic value to MM.
2) Market maker shorts Tesla shares to get money.
3) MM exercise calls right away with intention to cover MM's short position when MM get shares back.
4) MM had to wait 3 days caring short position over those days.

i won't pretend that i know exactly how this works. i do know it's very fishy the way thousands of these contracts trade and then never show up in the open interest. i have a theory that i think fits. but who knows until someone really investigates right?

you almost got the first sequence right, although i think the sequence is like this:
1) rogue trader arranges to sell deep in the money calls at a discount to where MM can get short shares executed.
2) Market maker shorts Tesla shares and buys options from rogue trader. print is posted on phlx.
3) MM exercise calls right away, effectively covering MM's short position. note: mm can naked short as they are exempted from normal rules.
4) rogue trader enters the assignment pool for the respective options that night and is short the next morning without having to borrow shares.

Next thing I'm not sure what happens. You say: "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".

So 5) would be guy buying back shares on open market to cover calls he sold to MM? Right?

yes that's correct, he would be buying back shares. but with algorithmic trading he could do this a pretty sneaky way. for example, with the shares he's planning on keeping naked short he could peg the options trade with the market maker relative to the volume weighted average price over a certain time range, and then simultaneously enter an order with a different broker to buy shares at the volume weighted average price over the same or very similar time range. the market maker would run a short at the vwap algorithm on their hedge shares, the other broker running a buy at vwap algorithm for the rogue's buy order. the two algorithms would be on opposite sides of the market, executing the order in small bits and pieces. his net fills on the two orders would be almost identical, he'd pay some commissions like 0.6c-1c per share or something, and no large prints of shares would ever hit the tape.

in the process, he would have covered his naked short, and then the next day he'd get assigned on the call options and it would start all over again.

Then why you say that it would show up in fails-to-deliver data? Have he delivered shares? Have he covered calls he sold? I mean if yes, he effectively shorted position for 3 days and then had to buy them on open market to cover. Or I'm missing something?

i think so because of the timing of the trades. the first place i noticed this was in the june 25 calls. the volume spiked every week starting may 5th, with no corresponding increases in open interest. note march 5, 12, 19, 25, and april 2. i'm not an expert on brokerage back office but my understanding is it goes something like this:

tues march 5th (t-1): rogue goes short deep in the money options instead of stock
weds march 6th (t): rogue is assigned on the short calls and wake up short a bunch of tsla. and still hold some calls which didn't get assigned to rogue. rogue is required to deliver the shares on day t+3.
thur march 7th (t+1): nothing, hold short. rogue pretends to look for shares to deliver. haha.
fri march 8th (t+2): again nothing
sat/sun march 9th/10th is a weekend.... so conveniently rogue has avoided the short charges for fri-sun nights.
mon march 11th (t+3): rogue is supposed to deliver shares but doesn't. i think this is supposed to trigger a failure to deliver, and these shares then show up on the sec list. the firm holding the account may deliver what shares they have on customer's behalf.
tues march 12th (t+4): shares that couldn't get delivered have to be bought in on this day (i think). so this is the day he repeats the trade.

and lo and behold there's the volume again on tues march 12th. and tues mar 19th. i think he switched to monday the week of mar 25th because of a shorter good friday week. then it's back to work tues apr 2. the next scheduled date we should see him is tuesday april 9th. tomorrow!

if i got it right he should never be around on mondays because then he could get caught paying the fri-sun night short charges. of course i didn't see anything today that matches him.

And how come you claiming that this scheme somehow is the way to avoid paying short interest? I mean for MM to buy those calls discount to intrinsic value of calls had to be bigger then short interest MM had to pay to carry on short position, right? Or MM would loose money on transaction. So this short in my understanding still paying short interest, but he do it in weird way...

the market maker has an exemption. he's allowed to naked short for the purpose of making markets.

my understanding is that short charges only apply after shares are delivered. so the rogue trader in my march 5th example above, even if the broker delivers some shares for him he won't start paying charges until march 11th when the shares are delivered. if he just shorted stock he'd start paying on march 8th. so this tactic buys him at least 3 days free. by repeating the strategy on the 12th, his worst case is that he pays for some shares for for 1 or 3 days (not sure which). compare to paying for all the shares for all 7 days of the week. it's a big savings, and perhaps it also gives him a chance to short when no shares are available.

i know my theory sounds a bit insane. but just consider if he had a 250,000 share short position it costs him almost $18000 per day at 65% borrowing rates to hold it. over a week that $126,000. over a month $500,000. just scale up for larger positions.

and i still can't find another explanation for why thousands upon thousands of deep-in-the-money calls keep trading on the philadelphia options exchange and never show up in open interest the next day.