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?
ggr, theoretically what you say is possible. however the evidence indicates that's not it. here's why:
(1) on some days the prints are so close together (minutes or seconds) that there's no consistent rational explanation why someone would get into 1000 contracts (which represent 100,000 shares) and then seconds later decide to flip out of it. and then repeat every tuesday.
(2) there have been days where some contracts trade 5 blocks of 100 contracts each with open interest of (say) 90 contracts. so you know the 100 contract blocks must be new activity, as no trader has 100 contracts to trade. with 5 blocks, only 4 could offset each other, implying open interest should go up by at least 100 contracts. instead the open interest doesn't change or declines, which means all traded contracts are getting exercised.
(3) the size of the trades is generally very large, consistently representing 25,000 to 150,000 shares per printed trade. if you've ever tried to move a position this large, you know you can't do it on a dime. even if a market maker let you get into it, he won't let you out moments later without exacting his pound of flesh.
(4) the regularity with which these trades happen and the way they happen regularly on tuesdays to make sure shares settle on friday before the weekend are not likely to be a day trader.
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.
the 3 stooges theory means there is no corner going on. larry & moe trade a spread with each other. so effectively larry is buying from moe who is selling to larry who is forced to sell to moe who is buying from larry. got that? :smile:
when they trade a call spread with each other and both exercise one side, they can effectively offset hundreds of thousands of shares with each other, leaving themselves only the stock and open interest they seek to harvest from shemp. go back and work through the original 3 stooges post you'll see what i mean.
the one thing you can be sure of - this is most likely two mid-size hedge funds or equity derivatives desks (like maybe at banks) that are doing this trade. the amount of capital required to exercise so many calls on both sides means both parties have to have substantial trading capital. they also have to have access to get into the lending pools for tesla shares pretty easily. if it's illegal i'm very curious to see who the regulators identify as the culprits.
it can't be a corner, because we've seen millions of shares equivalent cross almost every week for a few weeks now. if there were a corner, these guys would have to file with the sec as soon as they got over 5.5 million shares. also you know these positions are not unhedged positions, because you couldn't even put on trades like these with the volume as low as its been. not sure how to explain it but think about trying to buy 4.5 million shares on a day when only 3 million shares trade. you can't do it.
one could spend an eternity trying to figure out an algorithm. you never will. the trades are being posted from off the floor, most likely posted manually. they really don't care when exactly the trades get posted, only that they hit the strikes that they want with the volume that they want.
the 3 stooges theory allows you to predict: (a) which strikes they will do, (b) how much relative volume they will do in each strike, (c) when they will do it, and (d) why they do it. i posted where they would trade and relatively how much before yesterday's open to demonstrate that. the theory is completely consistent with the observed facts which are: (a) high rate earned for loaning out shares, (b) tens of thousands of contracts trading with no change in open interest and little discernible price impact, (c) the absence of increases in the open interest the next day, (d) suspicious trades only in strikes with zero time premium and meaningful open interest, and (e) daily share volumes which are below the volume that would be implied by the suspicious options volume.
originally i started this thread thinking it was a naked short, but that theory was falling apart as the trading volumes increased because (a) high naked shorts would put tesla on the reg sho list which didn't happen, (b) there was no way to cover the shares to match the rolling of the short when volume was far below the options volume, and (c) there was no good explanation of how they covered the naked short to avoid appearing on the reg sho list.
unless an alternate theory is presented that is consistent with all the observed facts, i will stand by the stooges.
to me the meaningful remaining questions are (1) is it legal, and (2) are there ramifications of this activity that create predictable price patterns worth trading. the subject remains interesting to me because it's a fascinating use of the technicalities of options to steal valuable interest bearing positions out of someone else's account.