The Rolling Naked Tesla Short

[PureAmps]

it's not a trade on and off. there are no economics in doing that and trading like that to create phantom volume is illegal.

Unfortunately, it is not possible to know this because the trades were performed within the price spread. There is clearly no economic value in putting a trade on and then immediately reversing it. There is also no economic value in those spreads as standalone positions either, as the max profit is break even. So the trades make no sense by themselves and are either intended to have some side effect or are trades executed for managing an existing prior position.

A few interesting notes from today's aftermath of those two spread trades.

The Apr 38 calls chart from today:

Volume in the Apr 38 calls was low today at 20 contracts. None of which seem to come from our mystery trader. Open interest was reduced by 108 contracts from the prior day. Yesterday's volume was 2508, of which we know 2400 came from the mystery trader, and the remaining 108 was probably "normal" trading. Since the extra volume was 108 and the open interest was reduced by 108, it is safe to assume that those 108 were closing trades and reduced open interest. The additional 2400 were either exercised, per the the three stooges theory, or the transaction was reversed generating no open interest.

The Apr 39 calls chart from today:

Volume in the Apr 39 calls was low today at 40 contracts. None of which seem to come from our mystery trader. Open interest was reduced by 515 contracts. Yesterday's volume was 2551, of which was know 2400 came from the mystery trader, and the remaining 151 was probably "normal" trading. Hmm, now this is interesting...

So there is no longer an easy way to explain away the reduction in open interest. So what happened here? Certainly some portion of the 151 "normal" trades were closing transactions. Let's just assume they all were, that leaves us with 364 contracts closed that are unaccounted for. So what are the possibilities:

• Somebody long the contract exercised 364 contracts and purchased the shares. This could have been the mystery trader, or any other trader. Exercising calls before expiration is not common for non-dividend paying stocks, so this is definitely odd behavior.
• Some portion of the 2400 contracts executed by the mystery trader were closing transactions, that closed prior open interest. While possible, this is unlikely as it doesn't make a lot of sense that only 364 out of 2400 contracts were closing transactions.

So why would somebody exercise 364 contracts? Mostly likely, because they were forced to close out a spread by being assigned on a higher strike price. To the Apr 40 charts we go:

Wow, don't even know how to begin analyzing this one. Let's start with yesterday's volume: 857 contracts. Today's reduction in open interest: 1931. Oops there's 1074 contracts not accounted for by volume alone. Somebody's exercising. And I bet a portion of that 1074 were some traders long the 39 and short the 40. So they are assigned on the 40, have to turn around and exercise on the 39. This causes cascade ripples throughout the entire option market.

Now the more interesting day on the Apr 40 chart is 4/5, where we have a reduction in open interest to the tune of 8,403 contracts with prior day's volume of only 257 contracts. That is a lot of exercising going on there. I bet you a lot of stock from covered calls was handed over that day. To who I wonder....

I could continue like this through the the 42 strike price for the April calls, all full of suspicious activity. All with one thing in common there was large volume and increase in open interest on or about 3/25. We then have a "surprise" announcement on 3/31, a big gap up in the stock on 4/1 and huge profit taking every since.

It's almost like somebody knew something....

 

[luvb2b]

Exercising calls before expiration is not common for non-dividend paying stocks, so this is definitely odd behavior.....Now the more interesting day on the Apr 40 chart is 4/5, where we have a reduction in open interest to the tune of 8,403 contracts with prior day's volume of only 257 contracts

the short rebate acts like a dividend and motivates early exercise.
when would you exercise a call option in a stock with a daily dividend payout at a 50% annualized rate, but never goes ex dividend?

i think you missed some volume in those 40s. a large trader had At least 5000 of a 40/45 call spread that he closed out that day or the day before.

 

[Causalien]

the short rebate acts like a dividend and motivates early exercise.
when would you exercise a call option in a stock with a daily dividend payout at a 50% annualized rate, but never goes ex dividend?

i think you missed some volume in those 40s. a large trader had At least 5000 of a 40/45 call spread that he closed out that day or the day before.

Almost sounds like someone fund that has to report their position wants to build up a stealth position through options and corner the stock through exercise. I was surprised my covered call got exercised today.

 

[PureAmps]

i think you missed some volume in those 40s. a large trader had At least 5000 of a 40/45 call spread that he closed out that day or the day before.

Well, in the chart from TD Ameritrade there is no volume higher than 1000 contracts after 4/3 in the Apr 40 contract. If their charts have incorrect volume data then any analysis performed using those charts would be kind of useless. Since traders make all kinds of financial decisions based on those charts, I'd be surprised if they were missing data.

But if you can find details of that trade, please post it. It would be interesting to know why it didn't show up in the chart.

Almost sounds like someone fund that has to report their position wants to build up a stealth position through options and corner the stock through exercise.

Exactly. Why would a trader exercise an option rather than just close the position and take the profit? Why accumulate a lot of stock through option exercise rather than just buy it on the open market? It's like somebody is *desperate* to acquire stock for a low price. Most likely somebody who has previously borrowed a lot of stock to sell short...

 

[Johan]

Exactly. Why would a trader exercise an option rather than just close the position and take the profit? Why accumulate a lot of stock through option exercise rather than just buy it on the open market? It's like somebody is *desperate* to acquire stock for a low price. Most likely somebody who has previously borrowed a lot of stock to sell short...

Not at all improbable. However, I would think that "aquring stock for a low price" would be the goal of any investor?

 

[avatar]

Not at all improbable. However, I would think that "aquring stock for a low price" would be the goal of any investor?

Is it possible someone wants to discretely acquire a large position of TSLA stock to reduce free float in the case of a short squeeze?

 

[luvb2b]

Well, in the chart from TD Ameritrade there is no volume higher than 1000 contracts after 4/3 in the Apr 40 contract. If their charts have incorrect volume data then any analysis performed using those charts would be kind of useless.

after comparing your charts to mine, i see the problem. your open interest graph is off by one day. generally the open interest that's reported by opra today is actually the open interest at the close of yesterday. your graph is taking the open interest reported today and saying that's the open interest of today. on my chart you'll see the open interest is dropping by the next close.

the big drop in open interest happens after the big voume on april 3rd. on the morning of april 3rd the open interest in the april 40 calls is 16,175. the next morning it's 7,772. the reason for the drop is that a large spread trader closed out 5000 april 40x45 call spreads on the 3rd. i thought i commented on this trade in real-time in another thread but i couldn't find it. also that morning a lot of people got freaked out by the non-exciting leasing announcement, so instead of waiting for the open of regular trading to sell, they exercised and sold that morning and in pre-market. check the premarket volume that day, it was huge. it was a lot easier to do that than trying to sell the april 40s that morning as the stock was collapsing. i know, because i was in the same dilemma.

Exactly. Why would a trader exercise an option rather than just close the position and take the profit? Why accumulate a lot of stock through option exercise rather than just buy it on the open market? It's like somebody is *desperate* to acquire stock for a low price. Most likely somebody who has previously borrowed a lot of stock to sell short...

someone else may have to try to explain it, apparently i'm not doing a good job.

they are exercising the calls because once the calls are far enough in the money they trade with zero time premium. at that point it's no longer economically rational to own the calls. that's because by exercising the calls and owning stock, many institutions can earn the full fee for lending the shares to shorts, earning 40-80% annualized calculated daily. on larger positions it's a lot of money. $500 a day on a 10000 share position for example. they are exercising to earn that profit, rather than carry the calls to expiration (thus sacrificing the opportunity to lend out the shares).

i think maybe the problem is you need to put pen to paper to understand how much profit there has been in lending the shares (or not having to pay to be short). it is 5-10c per share, per calendar day. on a thousand shares we're talking about $500 per week. if you owned 10 deep in the money calls, are you really going to choose to not exercise, and sacrifice the opportunity to earn an extra $500 per week? the only reason you'd do that is if you can't earn the fee to lend out the shares, or don't have enough cash to exercise.

what's the last stock you owned that paid a $500 weekly dividend on every 1000 shares, and never traded ex-dividend while doing it? it sounds like a fantasy.

- - - Updated - - -

Is it possible someone wants to discretely acquire a large position of TSLA stock to reduce free float in the case of a short squeeze?

trading monster call option positions and exercising them is not discreet.

in tesla an institution that really wanted a large position would go straight to buying the shares, because they could easily lend out those shares and earn extra 5-10c per share, per day.

i'm hard pressed to name another stock where an institution that bought a share for $37 would get paid $3 for a month. it's obscene!

 

[Causalien]

So it is basically a transfer of wealth from retail to brokerage firms so they can lend it out to whoever it is that is shorting Tesla big time. Because I know for sure I cannot get the same premium by lending it out myself.

Which means the brokers is willing to take the risk of stock potentially falling more than the premium, which means they know why it was shorted and deduct that the short won't work. Or is working in conjunction with the big short to gather more shares so they can be used on the next assault in tesla shares.

 

[luvb2b]

So it is basically a transfer of wealth from retail to brokerage firms so they can lend it out to whoever it is that is shorting Tesla big time. Because I know for sure I cannot get the same premium by lending it out myself.

Which means the brokers is willing to take the risk of stock potentially falling more than the premium, which means they know why it was shorted and deduct that the short won't work. Or is working in conjunction with the big short to gather more shares so they can be used on the next assault in tesla shares.

for sure retail longs are transferring wealth to their brokers. many of the retail agreements allow the broker to lend out shares without compensating the customer.

as for the brokers taking the risk of the stock falling more than the premium - yes and no. the market maker who owned the long stock+short deep in the money calls trade was delta hedging it. they did have some gap risk but are always adjusting the hedge as the stock moves up or down and cn manage the trade for profit in most conditions. the guys who steal this trade by exercising will do the same thing, or they are shorts who can save the full rebate for a little while.

no directional bet is involved in tesla to make profits on a long stock + short deep in the money call trade. it is a hedged position with zero upside as tesla rallies. there is major upside if the cost of shorting rises or stays high, but that doesn't always correlate to tesla going higher. this is not a strategy being used to "gather shares" for a secret long position. it is a strategy to gather fully hedged shares for the purpose of loaning to short sellers, which has recently had guaranteed daily payouts of 40-80% annualized. when the options eventually expire, the calls will most likely get assigned and the shares will be transferred on to whomever was long the calls.

here's a table which shows the cumulative profit per share from owning the stock, the cumulative profit per share from lending the shares, and the sum of the two. three scenarios to illustrate:

Date	Loan Rate	Close	Stock Gain	Loan Interest	Stock + Loan
17-Mar-13	-43.94%	$ 35.29		$ 0.04
18-Mar-13	-44.88%	$ 35.15	$ (0.14)	$ 0.09	$ (0.05)
19-Mar-13	-49.04%	$ 35.08	$ (0.21)	$ 0.13	$ (0.08)
20-Mar-13	-49.85%	$ 35.95	$ 0.66	$ 0.18	$ 0.84
21-Mar-13	-54.77%	$ 36.01	$ 0.72	$ 0.24	$ 0.96
22-Mar-13	-59.51%	$ 36.62	$ 1.33	$ 0.30	$ 1.63
23-Mar-13	-60.69%	$ 36.62	$ 1.33	$ 0.36	$ 1.69
24-Mar-13	-60.69%	$ 36.62	$ 1.33	$ 0.42	$ 1.75
25-Mar-13	-75.84%	$ 37.53	$ 2.24	$ 0.50	$ 2.74
26-Mar-13	-85.35%	$ 37.86	$ 2.57	$ 0.58	$ 3.15
27-Mar-13	-77.29%	$ 38.16	$ 2.87	$ 0.66	$ 3.53
28-Mar-13	-82.66%	$ 37.89	$ 2.60	$ 0.75	$ 3.35
29-Mar-13	-84.45%	$ 37.89	$ 2.60	$ 0.84	$ 3.44
30-Mar-13	-84.45%	$ 37.89	$ 2.60	$ 0.93	$ 3.53
31-Mar-13	-84.45%	$ 37.89	$ 2.60	$ 1.01	$ 3.61
1-Apr-13	-83.00%	$ 43.93	$ 8.64	$ 1.11	$ 9.75
2-Apr-13	-82.25%	$ 44.34	$ 9.05	$ 1.21	$ 10.26
3-Apr-13	-82.24%	$ 41.10	$ 5.81	$ 1.31	$ 7.12
4-Apr-13	-75.23%	$ 42.01	$ 6.72	$ 1.39	$ 8.11
5-Apr-13	-60.92%	$ 41.37	$ 6.08	$ 1.46	$ 7.54
6-Apr-13	-57.34%	$ 41.37	$ 6.08	$ 1.53	$ 7.61
7-Apr-13	-57.34%	$ 41.37	$ 6.08	$ 1.59	$ 7.67
8-Apr-13	-56.28%	$ 41.83	$ 6.54	$ 1.66	$ 8.20
9-Apr-13	-49.97%	$ 40.50	$ 5.21	$ 1.71	$ 6.92
10-Apr-13	-44.23%	$ 41.86	$ 6.57	$ 1.76	$ 8.33
11-Apr-13	-38.97%	$ 43.59	$ 8.30	$ 1.81	$ 10.11
12-Apr-13	-38.78%	$ 43.75	$ 8.46	$ 1.86	$ 10.32
13-Apr-13	-38.72%	$ 43.75	$ 8.46	$ 1.90	$ 10.36
14-Apr-13	-38.72%	$ 43.75	$ 8.46	$ 1.95	$ 10.41
Total % Return (3/17-4/14)	24.0%	5.5%	29.5%

a. for an institutional player, owning a deep-in-the-money call allows him to capture the stock gain only ($8.46 since 3/17, or 24.0%).
b. for an institutional player, owning the stock allows him to capture both the stock gain and the loan interest ($10.41 since 3/17 or 29.5%).
c. for an institutional player, owning the stock and being short a deep in the money call allows him to capture the loan interest only ($1.95 since 3/17, or 5.5%).

for an institutional player that wants direct price exposure to tesla's upside, (b) is clearly relative to (a). yeah, they can go out to near the money or out of the money strikes, but we're only considering deep-in-the-money here because that's where the suspicious activity is.

for an institutional player that doesn't want price exposure to tesla, they can choose scenario (c) which pays a very tidy sum but has relatively little direct price exposure to tesla. market makers fit into this category, and they when they hold tesla shares hedged with short calls, well these positions are generating 5% monthly gains with very little risk. that's why people are "stealing" them.

 

[PureAmps]

after comparing your charts to mine, i see the problem. your open interest graph is off by one day. generally the open interest that's reported by opra today is actually the open interest at the close of yesterday. your graph is taking the open interest reported today and saying that's the open interest of today. on my chart you'll see the open interest is dropping by the next close.

Yep, because I'm looking at a real-time chart which show's today's OI and volume. Since OI is not updated in real-time, the chart has a one-day skew for OI, since it shows OI as of the open.

someone else may have to try to explain it, apparently i'm not doing a good job.

No, you've explained your theory quite well.

But two people can look at the same data and draw two different conclusions. Without knowing more about the trader's entire position in TSLA (or entire portfolio for that matter), it is impossible to know what is really going on. I see this as somebody covering a short position, you see it as somebody creatively harvesting shares in a complex scheme to collect/avoid short interest. I think we both agree this is a highly unusual set of trades and circumstances.

But at the end of the day this is just a sideshow. Tesla's fate will be decided by building and selling tens (or even hundreds) of thousands of vehicles at a profit, not by the "shorts" or some "rogue" option trader. If they succeed at that over a long enough period of time, their stock will ultimately reflect the value of the company.

 

[luvb2b]

Tesla's fate will be decided by building and selling tens (or even hundreds) of thousands of vehicles at a profit, not by the "shorts" or some "rogue" option trader. If they succeed at that over a long enough period of time, their stock will ultimately reflect the value of the company.

well said.

 

[luvb2b]

tuesday again, which means our friend should be back. let's see if i can predict where he will be today. if he's harvesting open interest, he'll be in the strikes that are (a) deep-in-the-money, (b) zero time premium, and (c) have meaningful open interest to "steal".

may 35 call, oi 468
may 36 call, oi 132
may 37 call, oi 713
may 38 call, oi 481
jun 32 call, oi 341
jun 33 call, oi 329
jun 34 call, oi 162
jun 35 call, oi 2,077
jun 36 call, oi 1,452
jun 37 call, oi 663

the best way to harvest open interest is to put the biggest trades on the strikes that have the deepest open interest. so jun 35, 36, 37 and may 37 calls should see especially heavy activity.

 

[DonPedro]

Offloaded a bit at open today (44.19), to see if I can pick it up cheaper in the afternoon due to this "Tuesday Morning Special" trading.

 

[luvb2b]

Offloaded a bit at open today (44.19), to see if I can pick it up cheaper in the afternoon due to this "Tuesday Morning Special" trading.

wow i don't have enough confidence about what he does to trade on him. i have more confidence that after he steals the open interest the market makers have to adjust hedges the next morning, so there may be a quick trade there tomorrow.

 

[DonPedro]

wow i don't have enough confidence about what he does to trade on him. i have more confidence that after he steals the open interest the market makers have to adjust hedges the next morning, so there may be a quick trade there tomorrow.

Primarily I am long. But I play with 20-30% of the position for fun (and so far a modest profit over being passive). Selling at 44.19 isn't looking so good so far today, but we'll see...

 

[luvb2b]

and here he comes... volume so far, and it's all on the phlx. imo it's becoming very clear now it's a harvesting trade. he's in all the strikes i predicted, and notice the volumes are roughly 4x of the open interest.

may 35 call, oi 468 [email protected], [email protected], [email protected], [email protected] times 11:31-11:33 et
may 36 call, oi 132
may 37 call, oi 713 [email protected], [email protected], [email protected], [email protected] times 11:32-11:34 et
may 38 call, oi 481
jun 32 call, oi 341 [email protected], [email protected], [email protected], [email protected] times 11:33-11:35et
jun 33 call, oi 329 [email protected], [email protected], [email protected], [email protected] times 11:35-11:36et
jun 34 call, oi 162 [email protected], [email protected], [email protected], [email protected] times 11:35-11:36 et
jun 35 call, oi 2,077 [email protected], [email protected], [email protected], [email protected] times 11:36-11:37et
jun 36 call, oi 1,452 [email protected], [email protected], [email protected], [email protected] times 11:36-11:37et
jun 37 call, oi 663

 

[avatar]

and here he comes... volume so far, and it's all on the phlx. imo it's becoming very clear now it's a harvesting trade. he's in all the strikes i predicted, and notice the volumes are roughly 4x of the open interest.

may 35 call, oi 468 [email protected], [email protected], [email protected], [email protected] times 11:31-11:33 et
may 36 call, oi 132
may 37 call, oi 713 [email protected], [email protected], [email protected], [email protected] times 11:32-11:34 et
may 38 call, oi 481
jun 32 call, oi 341 [email protected], [email protected], [email protected], [email protected] times 11:33-11:35et
jun 33 call, oi 329 [email protected], [email protected], [email protected], [email protected] times 11:35-11:36et
jun 34 call, oi 162 [email protected], [email protected], [email protected], [email protected] times 11:35-11:36 et
jun 35 call, oi 2,077 [email protected], [email protected], [email protected], [email protected] times 11:36-11:37et
jun 36 call, oi 1,452 [email protected], [email protected], [email protected], [email protected] times 11:36-11:37et
jun 37 call, oi 663

SO I'm curious. How is he affecting the price today? Is he causing the price to go up?

 

[luvb2b]

SO I'm curious. How is he affecting the price today? Is he causing the price to go up?

no, i think these guys don't really trade shares on the open market. they just trade spreads with each other and exercise, which means all the volume happens off the exchanges through the options clearing mechanisms.

i do think they are probably either shorts or stat-arb type hedge funds that are doing this trade. and i'm not sure at all if it's legal.

i am pretty sure the price impact will be tomorrow, when the options market makers find themselves screwed up on their hedges. that means right at the open the market makers will be in buying shares. exactly how many depends on how much total options volume goes by, how much open interest is stolen, and what kind of delta hedge they were holding.

 

[Teslawisher]

Don't the market makers see this pattern, that every week at the same time, they find themselves having to adjust their hedges? Anything they can do about it? Or, are they pretty much hands tied behind their backs? I can't imagine they find this situation beneficial to them.

 

[Nicu.Mihalache]

i am pretty sure the price impact will be tomorrow, when the options market makers find themselves screwed up on their hedges. that means right at the open the market makers will be in buying shares. exactly how many depends on how much total options volume goes by, how much open interest is stolen, and what kind of delta hedge they were holding.

not sure it is related, there were two 150k share blocks traded today