The Rolling Naked Tesla Short

[luvb2b]

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

those are conversions. without even looking i know one of those blocks line up with a trade in the may 60s. i assume the guy owned 150,000 tesla, and decided to sell 150,000 tesla, sell 1500 may 60 puts, and buy 1500 may 60 calls. the whole thing was done in chicago.

he's getting paid quite well to do this trade, nearly $250k to expiration i think.

 

[Johan]

those are conversions. without even looking i know one of those blocks line up with a trade in the may 60s. i assume the guy owned 150,000 tesla, and decided to sell 150,000 tesla, sell 1500 may 60 puts, and buy 1500 may 60 calls. the whole thing was done in chicago.

he's getting paid quite well to do this trade, nearly $250k to expiration i think.

What is he risking here? Nothing? Something surely... That I'm too inexperienced to figure out.

 

[luvb2b]

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.

it sucks if you're a shemp market maker.

what shemp needs is someone on the opposite side of the call trade who wants to hold the deep in the money call. the only guys who are going to do that are some retail investors who can't get earn the share lending rebate. if they could earn the rebate and had the capital, they would buy the stock and possibly hedge with puts after earning enough rebate.

shemp can't find these guys just anywhere, but over time as he makes markets, he starts accumulating positions on the other side of them. that leaves shemp (market maker) long tesla shares to hedge being short tesla deep-in-the-money calls to retail investors who are long deep-in-the-money calls. it's a great position which allows shemp to earn a very nice carry on the share lending.

and of course larry & moe come along and steal that very valuable position right out from under their noses.

shemp could do the same thing to steal it back, but he has to find someone to collude with him. and since larry & moe do the trade on tuesday, they are guaranteed to earn the rebate for at least 3 nights because larry & moe's trades will settle friday. the soonest shemp could try to steal back the position would be monday, and he'd still miss 3 days of rebate.

it's a brilliant scheme. theft in broad daylight. never seen anything like it before.

 

[adiggs]

luvb2b - do you know of any other stocks / companies that are trading at similarly high levels for the short interest? I'm wondering if we might see this pattern in other companies with a high price to borrow shares for shorting. And then I wonder - once 'shemp' figures out what's happening to their position, what's to stop them from just not participating or making a market in the stock? I'm not an expert by any means, but that doesn't sound good for liquidity or anybody trading Tesla.

 

[luvb2b]

luvb2b - do you know of any other stocks / companies that are trading at similarly high levels for the short interest? I'm wondering if we might see this pattern in other companies with a high price to borrow shares for shorting. And then I wonder - once 'shemp' figures out what's happening to their position, what's to stop them from just not participating or making a market in the stock? I'm not an expert by any means, but that doesn't sound good for liquidity or anybody trading Tesla.

don't worry about shemp. lol.

he still makes money on the trade - the initial market he made allowed him to earn a slight profit in the bid/ask spread. it's just that the position turns into a cash cow if the option goes well in the money, and that's when larry & moe come and steal it.

i know there are other stocks with high short interest, and i suspect this isn't the first time larry & moe have been to the rodeo.

- - - Updated - - -

What is he risking here? Nothing? Something surely... That I'm too inexperienced to figure out.

there are 2-3 very subtle risks that come up for a long term holder. they are really sort of unusual things:

1. the shares the guy was holding were most likely insured by sipc coverage as securities holdings. by selling the shares, he's collecting cash. that cash is probably held by the broker in a non-insured way, so one risk is if the broker fails, the cash he collected is at risk. this would be a major headache, but unlikely if he's using a very good firm.

2. if he takes the whole position to expiration, two other risks arise: first, if the stock closes too close to the 60 strike, he may not have a good handle of whether or not he'll get assigned on the short put. in that case he may find himself with more or less shares than he intended, or in a worst case twice as many shares as he wanted.

3. second risk if you go to expiration happens if the call finishes in the money on expiration friday. assume he exercises that call, and isn't paying attention a few minutes after the market closes. if tesla releases some bad news in those minutes and the stock nosedives below 60, the put holder will exercise his put. even though it looked like the put was out of the money at the close of trading on friday, the put holder exercises with the knowledge that the after-hours news will cause the stock to be below 60 on monday morning. in this case he'll find himself long twice as much tesla as he wanted while it's falling off a cliff. absolutely horrible place to be.

all 3 of the risks are pretty rare events. by not holding the position all the way to expiration the trader can eliminate 2 out of the 3 problems.

for a short term holder there's a another risk: if the cost of shorting increases further, the position of being long $60 calls/short $60 puts will underperform the common. in that situation you could have the stock go nowhere, the cost of shorting rise, and the value of the position fall.

most likely this trader is a long term holder who is looking to earn a nice extra kicker while maintaining full long exposure, not a short term trader.

 

[luvb2b]

here are the final updates, once again monster volume done this way, all on the philly. you guys notice the total call option volume in tesla today is 71,000 contracts. the trades i highlight below account for over 45,000 of the 71,000 traded call option contracts. these trades are representing 4.5 million shares of tesla, about 150% of the day's volume of 3 million, 4% of the total outstanding shares of the company, and 6-7% of the float. holy sh** that's big.

may 35 call, oi 468 vol 2936: [email protected], [email protected], [email protected], [email protected], [email protected] times 11:31-11:33, 3:18 et
may 36 call, oi 132 vol 784: [email protected], [email protected], [email protected], [email protected], [email protected] times 11:32-11:33, 3:18 et
may 37 call, oi 713 vol 2800: [email protected], [email protected], [email protected], [email protected] 11:32-11:34 et
may 38 call, oi 481 vol 2000: [email protected], [email protected], [email protected], [email protected] times 3:38-3:43 et
jun 32 call, oi 341 vol 2082: [email protected], [email protected], [email protected], [email protected], [email protected] times 11:33-11:35, 3:18 et
jun 33 call, oi 329 vol 2058: [email protected], [email protected], [email protected], [email protected], [email protected] times 11:35-11:36, 3:19 et
jun 34 call, oi 162 vol 1004: [email protected], [email protected], [email protected], [email protected], [email protected] times 11:35-11:36, 3:19 et
jun 35 call, oi 2,077 vol 11,992: [email protected], [email protected], [email protected], [email protected], [email protected] times 11:36-11:37, 3:19et
jun 36 call, oi 1,452 vol 5600: [email protected], [email protected], [email protected], [email protected] times 11:36-11:37et
jun 37 call, oi 663 vol 2800: [email protected], [email protected], [email protected], [email protected] times: 3:38-3:43et

i'm getting tired so i'll just abbreviate the trades in the april strikes. i didn't think they would work these strikes as they can only collect 3 days of interest, but apparently that's enough for them. volumes are the volumes for these goofy trades, not overall volume.

apr 34 calls, oi 261 vol 300
apr 35 calls, oi 1051 vol 710
apr 37 calls, oi 858 vol 1128
apr 38 calls, oi 3381 vol 5330
apr 39 calls, oi 630 vol 4060

 

[Johan]

there are 2-3 very subtle risks that come up for a long term holder. they are really sort of unusual things: [...]

Thank you for taking the time to explain this. My follow up question then would be: Why shouldn't I myself as a personal long investor do the same? I have 1500 TSLA that I consider my core long position that I will want to hold certainly beyond 2014. Right now today I could but 15 Jan2014 $60 Calls @$1.40 per contract and at the same time sell 15 Jan2014 $60 Puts @ $21.20 per contract making for a total payout of $29.700 on the options trade. At the same time I sell the 1500 TSLA shares for a total of $68.385. All in all I now have $98.085, no TSLA shares but a call contract for 1500 shares at $60. Now, please correct me if I'm wrong:
- If TSLA goes up the calls I own get more and more valuable and the puts I've sold loose more and more (intrinsic) value, if TSLA goes over $60 the puts have no intrinsic value any more and the calls get more and intrinsic value (in the money). In this scenario time value is my friend too, as we get closer to expiry. If there is a short squeeze or TSLA peaks for some other reason, I can get out of the put for next to nothing and then choose to either exercise the call option and buy TSLA way below market price, or to sell the call option for a high price.
- If TSLA goes down the calls become worthless more or less and the more TSLA drops the more the puts I've sold get in the money and hence I'm more in trouble. If TSLA drops to somewhere near $0 and the puts are exercised on me I will be forced to buy 1500 TSLA at $60 for a total of $90.000. That sucks, but it's still less than the $98.085 I got paid to do the whole trade in the first place. And this is the absolute worst case scenario (TSLA close to $0).
- If I close both positions simultaneously before expiry I'm not risking point 2 and 3 from your list above. If TSLA has dropped when I choose to close the calls will be more or less worthless i.e. I will get very little for them while it will cost me to close/buy back the puts, however as per above never more than I made on the trade initially. And if I'm in this position I can use whatever left to buy back TSLA shares, that are now cheaper than they were when I made the initial trade.

 

[PureAmps]

I was really hoping to quit this thread, but I keep getting sucked back in.

Following up on the trades luvb2b poster earlier, here's a snapshot of today's trades that makes it a little easier to understand (at least for me):

These are all trades of 100 contracts or more on the PHLX exchange during a few blocks of time when this trader appeared to be active (all times are in PDT):

The morning block (8:28am - 8:37am):

The afternoon blocks (Block A from 12:17pm - 12:19pm, and Block B from 12:38pm - 12:43pm):

So a few observations that I continue to see.

The trades in the morning block and the afternoon "B" block are always in pairs of the same contract size. This is highly unusual. Why execute trades of the same size within seconds of each other at the same price? Not enough bid/ask to fill the order? Seems dubious, since it is filled seconds later. Would love to hear theories...

The other oddity I noticed is many trades are marked with a spread condition (one even is marked as a straddle), yet there is no pairing transaction to be found. So this trader is using spread/straddle conditions on their orders, but not executing spread/straddle trades. Very odd....

Now the afternoon "A" block of trades is different. Here you have trades across multiple dates and strikes being executed within minutes of each other. Most of these trades were not executed in multiples of 10/50/100/etc. either, unlike the other blocks of trades. They are not paired, there is one order for each date/strike price combination.

Ok, now I give up...

 

[PureAmps]

It turns out the trade sizes in the afternoon "A" block trade are not so random after all. Those quantities are exactly twice the current open interest for each option contract. The only exception being the Jun 35 calls which traded at a size of 3,992 with an open interest of 2,077.

 

[kenliles]

I don't believe these are actual market trades because both sides of the 'trade' are being conducted by the same party (market maker or proxy of same); so IMHO the current theories are incorrect. Although the purpose might be to actually PREVENT the stealing of the MM spread position as luvb2b describes. Essentially the MM taking advantage of the (con)current short-squeeze/short-demand market condition for its own benefit, in the guise of its commission to create the market.
Disclaimer: I have no idea what I'm talking about so please hold no respect for this opinion. But there it is, that's what I currently believe.

 

[Causalien]

I was really hoping to quit this thread, but I keep getting sucked back in.

Following up on the trades luvb2b poster earlier, here's a snapshot of today's trades that makes it a little easier to understand (at least for me):

These are all trades of 100 contracts or more on the PHLX exchange during a few blocks of time when this trader appeared to be active (all times are in PDT):

The morning block (8:28am - 8:37am):

View attachment 20215

The afternoon blocks (Block A from 12:17pm - 12:19pm, and Block B from 12:38pm - 12:43pm):

View attachment 20217

So a few observations that I continue to see.

The trades in the morning block and the afternoon "B" block are always in pairs of the same contract size. This is highly unusual. Why execute trades of the same size within seconds of each other at the same price? Not enough bid/ask to fill the order? Seems dubious, since it is filled seconds later. Would love to hear theories...

The other oddity I noticed is many trades are marked with a spread condition (one even is marked as a straddle), yet there is no pairing transaction to be found. So this trader is using spread/straddle conditions on their orders, but not executing spread/straddle trades. Very odd....

Now the afternoon "A" block of trades is different. Here you have trades across multiple dates and strikes being executed within minutes of each other. Most of these trades were not executed in multiples of 10/50/100/etc. either, unlike the other blocks of trades. They are not paired, there is one order for each date/strike price combination.

Ok, now I give up...

Looks like a hft pattern.

 

[luvb2b]

I don't believe these are actual market trades because both sides of the 'trade' are being conducted by the same party (market maker or proxy of same).

as you described it this would be an illegal trade, basically trading back and forth with yourself for the purposes of creating volume. no one in their right minds would do the trade in the kind of size it's being done. anyone with that much money will know the trade is illegal, and it will be very easily get flagged due to the large size. imo the notion that the trades are one person trading with himself is a complete non-starter.

in the 3 stooges game the market maker cannot prevent the theft of his long stock+short call position. if he enters some countering trade with someone else, all he can do is dilute how much of his position his stolen. he can't stop them.

at this point i can confirm that the "review" of these trades has stepped up one level. i'm pretty sure if it was something simple it would have been identified and stopped by now.

- - - Updated - - -

My follow up question then would be: Why shouldn't I myself as a personal long investor do the same? I have 1500 TSLA that I consider my core long position that I will want to hold certainly beyond 2014. Right now today I could but 15 Jan2014 $60 Calls @$1.40 per contract and at the same time sell 15 Jan2014 $60 Puts @ $21.20 per contract making for a total payout of $29.700 on the options trade. At the same time I sell the 1500 TSLA shares for a total of $68.385. All in all I now have $98.085, no TSLA shares but a call contract for 1500 shares at $60.

you kinda have the gist of it here, but your math is way way way off. until you get that down 100% i wouldn't consider doing the trade.

buy jan 2014 $60 calls for $1.40, sell jan 2014 $60 puts for $21.20 means you got an effective cost of buying tesla at:

$60 - $21.20 + 1.40 = $40.20.

if you sold your tesla shares at $45.50, sold the puts and bought the calls, and didn't encounter any unusual risks along the way, then yes theoretically you would end up $5 richer in january and still have your shares.

please don't take for granted my math is correct as i often make mistakes. make sure you work it out with your advisor / broker to make sure you understand how everything works.

 

[kenliles]

as you described it this would be an illegal trade, basically trading back and forth with yourself for the purposes of creating volume. no one in their right minds would do the trade in the kind of size it's being done. anyone with that much money will know the trade is illegal, and it will be very easily get flagged due to the large size. imo the notion that the trades are one person trading with himself is a complete non-starter.

in the 3 stooges game the market maker cannot prevent the theft of his long stock+short call position. if he enters some countering trade with someone else, all he can do is dilute how much of his position his stolen. he can't stop them.

at this point i can confirm that the "review" of these trades has stepped up one level. i'm pretty sure if it was something simple it would have been identified and stopped by now.

Thanks, I defer to your better judgement.

Looks like TSLA holding up remarkably well this morning given the market sell off. Hedges must in in buying on rebalance. If so, we may see a delayed pullback if we don't run out of sellers first

 

[Nicu.Mihalache]

you kinda have the gist of it here, but your math is way way way off. until you get that down 100% i wouldn't consider doing the trade.

I think the math is OK, once you understand that the sums like "$29.700" means $29,700 total from 15 pairs of long call / short put options etc. - it took me a while too to get it

 

[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"... 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.

i guess the whole point of developing theories is prediction right? you develop a theory, and then based on that theory you would have some predictions. you make observations to see if your predictions are accurate. based on the 3 stooges theory, yesterday morning i was predicting the strikes i expected to see the fishy trades, and mentioned that volume would be proportional to open interest. i didn't look to april strikes as i thought there wasn't enough time to expiration.

i posted the trades yesterday, so let's check the open interest to see if it vanished again. where is 4.5 million shares of open interest going? so far 3 stooges remains the best explanation to me.

apr 34 calls, oi 261 vol 300 ---> today's oi 50
apr 35 calls, oi 1051 vol 710 ---> today's oi 115
apr 37 calls, oi 858 vol 1128 ---> today's oi 142
apr 38 calls, oi 3381 vol 5330 ---> today's oi 392
apr 39 calls, oi 630 vol 4060 ---> today's oi 443
may 35 call, oi 468 vol 2936 ---> today's oi 439
may 36 call, oi 132 vol 784 ---> today's oi 121
may 37 call, oi 713 vol 2800 ---> today's oi 132
may 38 call, oi 481 vol 2000 ---> today's oi 158
jun 32 call, oi 341 vol 2082 ---> today's oi 318
jun 33 call, oi 329 vol 2058 ---> today's oi 308
jun 34 call, oi 162 vol 1004 ---> today's oi 153
jun 35 call, oi 2,077 vol 11,992 ---> today's oi 1,850
jun 36 call, oi 1,452 vol 5600 ---> today's oi 1,434
jun 37 call, oi 663 vol 2800 ---> today's oi 626

wow look at that! the open interest declined in every option series where the stooges were active yesterday. 4.5 million shares worth of options trades, and all of those and more vanish overnight. in some of these options there were no other trades except for the blocks on the psx. seeing the open interest declining in those series by odd amounts means that you are definitely getting options exercises taking place. also some of the trades yesterday were huge blocks. how about 2,992 of the june 35 calls. where did they go? imo, they had to be exercised.

 

[Causalien]

i guess the whole point of developing theories is prediction right? you develop a theory, and then based on that theory you would have some predictions. you make observations to see if your predictions are accurate. based on the 3 stooges theory, yesterday morning i was predicting the strikes i expected to see the fishy trades, and mentioned that volume would be proportional to open interest. i didn't look to april strikes as i thought there wasn't enough time to expiration.

i posted the trades yesterday, so let's check the open interest to see if it vanished again. where is 4.5 million shares of open interest going? so far 3 stooges remains the best explanation to me.

apr 34 calls, oi 261 vol 300---> today's oi 50
apr 35 calls, oi 1051 vol 710 ---> today's oi 115
apr 37 calls, oi 858 vol 1128---> today's oi 142
apr 38 calls, oi 3381 vol 5330---> today's oi 392
apr 39 calls, oi 630 vol 4060---> today's oi 443
may 35 call, oi 468 vol 2936 ---> today's oi 439
may 36 call, oi 132 vol 784 ---> today's oi 121
may 37 call, oi 713 vol 2800 ---> today's oi 132
may 38 call, oi 481 vol 2000 ---> today's oi 158
jun 32 call, oi 341 vol 2082 ---> today's oi 318
jun 33 call, oi 329 vol 2058 ---> today's oi 308
jun 34 call, oi 162 vol 1004 ---> today's oi 153
jun 35 call, oi 2,077 vol 11,992 ---> today's oi 1,850
jun 36 call, oi 1,452 vol 5600 ---> today's oi 1,434
jun 37 call, oi 663 vol 2800 ---> today's oi 626

wow look at that! the open interest declined in every option series where the stooges were active yesterday. 4.5 million shares worth of options trades, and all of those and more vanish overnight. in some of these options there were no other trades except for the blocks on the psx. seeing the open interest declining in those series by odd amounts means that you are definitely getting options exercises taking place. also some of the trades yesterday were huge blocks. how about 2,992 of the june 35 calls. where did they go? imo, they had to be exercised.

I didn't keep track, but do you have an idea how many has been exercised?

 

[luvb2b]

I didn't keep track, but do you have an idea how many has been exercised?

my post was basically saying that the 45,000 calls that the stooges traded were exercised yesterday, and then even more on top of that.

 

[ggr]

wow look at that! the open interest declined in every option series where the stooges were active yesterday. 4.5 million shares worth of options trades, and all of those and more vanish overnight. in some of these options there were no other trades except for the blocks on the psx. seeing the open interest declining in those series by odd amounts means that you are definitely getting options exercises taking place. also some of the trades yesterday were huge blocks. how about 2,992 of the june 35 calls. where did they go? imo, they had to be exercised.

Continuing my series of naive questions: couldn't the original seller just buy them back to close their position? That would also reduce the open interest, wouldn't it?

 

[PureAmps]

Continuing my series of naive questions: couldn't the original seller just buy them back to close their position? That would also reduce the open interest, wouldn't it?

I don't think that's a naive question at all. I think that is a very plausible explanation for a portion of the trades. It is unusual to be able to buy a security and then sell it back to the same price because of price spreads, but many of those transactions occurred within the spread.

However, we have evidence that there is some exercising occurring in those same contracts, and not all trades can be paired up in that way. I have still not heard a theory that can explain all of the behaviors seen in those trades.

- - - Updated - - -

Looks like a hft pattern.

Not really hft, but definitely very algorithmic. It could very well be somebody's tradebot having a little fun in the TSLA option market.

It is operating under some clear rules. For example, it swept the 35-39 strikes in the Apr expiration, but skipped over the 36 strike because OI was only in the 30s. It seems to have a cut-off of 100 contracts or more for open-interest. I suspect the strike range is driven by the option's delta, but haven't tried to determine a cutoff (but seems to be .7 or higher).

 

[Causalien]

I don't think that's a naive question at all. I think that is a very plausible explanation for a portion of the trades. It is unusual to be able to buy a security and then sell it back to the same price because of price spreads, but many of those transactions occurred within the spread.

However, we have evidence that there is some exercising occurring in those same contracts, and not all trades can be paired up in that way. I have still not heard a theory that can explain all of the behaviors seen in those trades.

- - - Updated - - -



Not really hft, but definitely very algorithmic. It could very well be somebody's tradebot having a little fun in the TSLA option market.

It is operating under some clear rules. For example, it swept the 35-39 strikes in the Apr expiration, but skipped over the 36 strike because OI was only in the 30s. It seems to have a cut-off of 100 contracts or more for open-interest. I suspect the strike range is driven by the option's delta, but haven't tried to determine a cutoff (but seems to be .7 or higher).

@luvb2b
That's a $202million commitment in one day. Seriously, if this continues, my theory of someone using options to secretly corner the market like VW replay is more and more likely. Except this time, they learned the lesson that having options without the capital backing to exercise is not enough.

@PureAmps
Yeah, that's what it felt like when I see it. The only problem with this theory is that the algorithm is usually constant throughout the day. This one is in bursts. The only way to verify is to reverse engineer the trigger and monitor all options chains to see if it is indeed going on all the time. But the trades it is doing doesn't really make sense, you don't need to go ultra fast to feel out if there are hidden orders or not.. If we go with hft theory, I can only think of some robot bought a ETF that includes Tesla and the robot selectively do the reverse of the ETF trade because it wants to exclude TESLA from the ETF due to its volatility.