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![YOU HAVEN'T COVERED YOUR SHORTS ORTY * fisM EMS+ Cy)EF ANDICAN SHOW П МАTНЕМАTICALLY By the Office of Compliance Inspections and Examinations! Volume III, Issue 2 August 9, 2013 Strengthening Practices for Preventing and Detecting Illegal Options Trading Used to Reset Reg SHO Close-out Obligations Options are priced in the market place so that the price of the underlying security is the same as the "synthetic"19 price of its options. This relationship between the price of a security and its options is known as "Put/Call Parity." consists of a long call and short put of the same strike and expiration date (also known as a “long combination" position), is typically the equivalent of a 100 share long position in an equity security." When the “synthetic" position is priced correctly with respect to the actual shares, no potential profit opportunities exist in the market. In other words, being long the “synthetic" position (e.g., the long combination) and being short the actual shares normally results in a riskless, fully hedged, and profitless position. This position is commonly known in the industry as a “Reversal."2² The following is taken from the SEC's 2003 report on "Strengthening Practices for Preventing and Detecting Illegal Options Trading Used to Reset Reg SHO Close-out Obligations" ?20 For example, a “synthetic" long position, which The Initial Transaction Example: Stock XYZ trading $51.00 • May 50 Puts on XYZ trading $3.00 The shorter who wants to hide their short position will transfer to a synthetic short position. This consists of having CALLS and PUTS at the same strike price, an open short May 50 Calls on XYZ trading $3.00 Trader A: Sells 10,000 shares XYZ @ $51.00 Buys 100 May 50 Calls @ $3.00 Sells 100 May 50 Puts @ $3.00 In this example, the “synthetic" position is trading for $50, which is simply Call Price - Put Price + Strike Price. The actual shares are trading for $51, so that Trader A has effectively sold shares for $1 more than it paid for them, in a simultaneous transaction. Each time the trade is made, Trader A is earning a $100 profit“, assuming that (a) Trader A is not being charged a fee to borrow shares to deliver on the short sale and (b) the clearing firm does not effect a buy-in against the trader to close-out a fail to deliver position.2" In this case, the trade was made 100 times, so that the profit would be $10,000. The sole reason for the disparity between the actual shares and the “synthetic" position is the fact that the shares of XYZ are hard to borrow. position, and then a swap of the original short position to the synthetic short. In the industry this is referred to as a "reversal". The Second Transaction to “Reset the Clock" The shorter does not want to deliver/cover. They want to Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is unable (or unwilling2) to borrow shares to make delivery on the short sale of actual shares, the short sale may result in a fail to deliver position at Trader A's elearing firm. Rather than paying spoof to the clearing house that they covered by converting to the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the shares in the market, Trader A might next enter into a trade that gives the appearance of satisfying the broker-dealer's close-out requirement, but in reality allows Trader A to maintain its short position without ever delivering on the short sale. Most often, this is done through the use of a buy-write trade, but may also be done as a married put and may incorporate the use of a synthetic short position. This allows the shorter to maintain their short position without ever actually delivering the share(s). short term FLEX options.9 These trades are commonly referred to as "reset transactions," in that they have the effect of resetting the time that the broker-dealer must purchase or borrow the stock to close-out a fail. The transactions could be designed solely to give the appearance of delivering the shares, when in reality the trader has no intention of meeting his delivery obligations. The buy-writes may be (but are not always) prearranged trades between market- makers or parties claiming to be market makers. The price in these transactions is determined so that the short seller pays a small price to the other market-maker for the trade, resulting in no economic benefit to the short seller for the reset transaction other than to give the appearance of meeting his delivery obligations. Such transactions were alleged by the Commission to be sham transactions in recent enforcement cases. 3" Such transactions between traders or any market participants have also been found to constitute a violation of a clearing firm's responsibility to close out a failure to deliver. When they perform this trade it is a "reset transaction" because they are resetting the Failure To Deliver (FTD). The only net loss on this trade is that the shorter pays a small premium to the Market-Maker for the reset transaction. 31 Trader A may enter a buy-write transaction, consisting of selling deep-in-the-money calls and buying shares of stock against the call sale. By doing so, Trader A appears to have purchased shares to meet the broker-dealer's close-out obligation for the fail to deliver that resulted from the reverse conversion. In practice, however, the circumstances suggest that Trader A has no intention of delivering shares, and is instead re-establishing or extending a fail position. With the Deep OTM PUT and Deep ITM CALL, the CALL is sold to the Market-Maker, whom sells shares to the shorter. The shorter can then say to the clearing house that they "have the These circumstances vary. For example, Trader A may be engaging in buy-writes with a known counterparty, such as another market maker (Trader B) that Trader A pays to take the other side of its reset transactions. In this circumstance, Trader A and Trader B agree on a price at which the buy-write will be transacted. The trade is consummated as a spread, with the stock and option portions executed at the same time. Trader A sells calls to Trader B, and Trader A buys shares from Trader B. The size of the trade is dictated by how many shares Trader A is required to deliver to appear to have closed out the settlement fail arising from his short position and avoid a buy-in or large borrowing fees. Trader A knows or has reason to know that the counterparty to the buy-write will not deliver securities in settlement of the transaction. Rather, shares to cover with" and thus reset their FTD. This is valid because a bona-fide Market-Maker can sell the shorter shares without first locating them. on the same day of the buy-write, Trader B will, in almost every case, exercise the deep in-the- money options it bought from Trader A in order to eliminate the short position created by selling The Market-Maker then exercises the Deep ITM CALLS to get The two counterparties trade deep in-the-money calls with little to no open interest, so that Trader A knows that when Trader B exercises its calls, Trader A will be the one assigned2 on the exercised calls. As a result of the assignment on the exercised calls, Trader A has another delivery obligation. Trader A, or its broker-dealer, remains unable (or unwilling) to borrow shares to make delivery, and the reset transaction may result in a fail to deliver position at Trader A's clearing firm. The result may be a persistent fail to deliver position in the security at issue. the shares they sold to the shorter returned to them. After this transfer, the Market-Maker is now out of the trade with a little cash from the premiums. To the broker-dealer or clearing firm, it may appear that Trader A’s purchase, in the buy-write, has allowed the broker-dealer to satisfy its close-out requirement. Trader A continues to execute a buy-write reset transaction whenever necessary, and by the time of expiration of its original Reversal, it may have given up some of the profits in the form of premiums paid for the buy- writes, but it has maintained its short position without paying the higher cost to borrow or purchase shares to make delivery on the short sale. In each buy-write transaction, Trader A is aware that the deep in-the-money options are almost certain to be exercised (barring a sudden huge price drop), and it fully expects to be assigned on its short options, thus eliminating its long shares. In the end, the shorter has made it appear as if they obtained shares to cover their original short position. But now they are synthetically short the options. So therefore, we should see a massive PUT OI permanent increase, because the PUTS are left on the record, while the CALLS are traded and exercised immediately. Suspicious Deep ITM CALL activity should also roughly mirror PUT activity. This would indicate that they have most likely performed the buy-write trade of: 1) Creating the synthetic position with Deep ITM CALLS and Deep OTM PUTS. 2) Used the ITM CALLS to swap shares instantaneously to make it "appear" to the Clearing House that they covered their original short position / FTD. 3) Become net short the synthetic position. Suspicious deep ITM call volumes and FTDS in 2021 Strike Bin 250000 - (0, 2] (2, 5] (5, 10] E4 200000 - Approximately 1.1 million CALLS are bought and exercised prior (10, 15] (15, 20] (20, 25] to January 29th (SI Report Date) (25, 30] (30, 40] (40, 60] (60, 80] (80, 110] (110, 150] (150, 190] 150000 - About 400K ITM CALLS are created and exercised in February/March. 100000 - 1 (190, 240] 50000 - Date 1e6 GME Option Open Interest since Jan 2020 2.00 1.75 Call / Put Approximately 1.1 million PUTS created prior to January 29th (SI Report Date) Call Open Int 1.50 Put Open Int hy 1.25 1.00 Bumps in OI coinciding with 0.75 Deep ITM CALL purchases at Feb and March runup 0.50 0.25 2020-07 2020-09 2020-11 2021-01 2021-03 2021-05 2021-07 Charts per /u/broccaaa Date Date Total 247 1/14/2021 502,598 1/15/2021|---> 1/19/2021 1/20/2021 1/21/2021 1/22/2021 1/25/2021 1/26/2021 1/27/2021 1/28/2021 1/29/2021|---> 2/1/2021 2/2/2021 2/3/2021 2/4/2021 2/5/2021 2/8/2021 2/9/2021 2/10/2021 248 585,123 We see an increase of about 1.1m PUT OI between Jan 15 and the next SI 249 249,889 250 331,071 251 364,455 Report Date 252 410,060 253 505,654 254 832,509 2021 Short Interest Reporting Dates 255 1,106,302 256 1,552,657 257 1,674,782 1,546,119 Settlement Date Due Date' Exchange Receipt Date 258 259 1,728,333 260 1,875,353 January 15 (Friday) January 20 - 6 p.m. (Wednesday) January 27 (Wednesday) 261 1,911,051 262 2,045,791 263 1,805,792 264 1,844,186 265 1,871,428 January 29 (Friday) February 2 - 6 p.m. (Tuesday) February 9 (Tuesday) 2/11/2021 2/12/2021 2/16/2021 2/17/2021 2/18/2021 266 1,879,597 267 1,869,435 268 1,598,887 269 1,602,796 270 1,607,826 2/19/2021 2/22/2021 2/23/2021 2/24/2021 2/25/2021 271 1,608,640 1,232,128 1,263,435 272 273 274 1,271,930 275 1,286,860 Another increase of about 248k PUT OI around February 26 2/26/2021|---> 3/1/2021 3/2/2021 3/3/2021 3/4/2021 3/5/2021 3/8/2021 3/9/2021 3/10/2021 276 1,511,611 277 1,364,820 278 1,400,224 279 1,436,690 280 1,451,299 281 1,452,830 282 1,311,110 1,370,785 1,434,321 283 And another increase of about 200k PUT OI around March 12, for a total of ~200k + 248k = 450k PUT OI in February/March 284 3/11/2021 3/12/2021|---> 3/15/2021 3/16/2021 285 1,555,256 286 1,631,429 287 1,482,158 ||D 288 1,531,675 With the PUT OI being spread far and wide upon option dates available during the January runup when these buy-write trades occurred. Ever wonder why PUT OI was so high for July 16th, 2021? It reached approximately 174,000 OTM OI on January 29th. It has since gained more OI most likely due to continued can-kicking of buy-write trades over the past few months. Total PUT OI Upon Expiration (Or Latest Sample) 2/12/2021 2/19/2021 1/29/2021 2/5/2021 3/19/2021 4/16/2021 7/16/2021 1/21/2022 327,000 263,000 244,000 322,000 447,000 427,000 427,000 274,000 To top it off, CALL OI remains the same, despite the 1.1m Deep ITM CALLS traded in January. Showing that these were most likely bought and then immediately exercised. 5 Quote Date 1/14/2021 1/15/2021 1/19/2021 1/20/2021 1/21/2021 1/22/2021 1/25/2021 1/26/2021 1/27/2021 367,271 403,479 247 248 235,891 270,175 297,823 343,682 249 250 251 252 253 264,624 323,864 362,091 254 255 1/28/2021 1/29/2021 2/1/2021 2/2/2021 2/3/2021 2/4/2021 2/5/2021 2/8/2021 2/9/2021 2/10/2021 2/11/2021 2/12/2021 2/16/2021 2/17/2021 2/18/2021 2/19/2021 2/22/2021 2/23/2021 2/24/2021 2/25/2021 2/26/2021 3/1/2021 3/2/2021 3/3/2021 3/4/2021 3/5/2021 3/8/2021 3/9/2021 3/10/2021 3/11/2021 256 290,092 257 282,523 258 204,558 231,549 286,656 312,241 259 260 261 359,982 249,368 262 263 264 287,678 265 316,688 266 346,096 267 366,021 230,206 261,925 268 269 270 289,543 271 337,764 165,606 198,110 204,952 238,087 272 273 274 275 276 275,054 277 129,820 278 132,536 279 134,028 280 135,009 281 135,557 282 136,353 283 137,862 284 140,735 141,138 146,712 285 3/12/2021 3/15/2021 3/16/2021 286 p3 CALL and PUT data per /u/yelyah2 287 148,372 288 4:07 ul LTE A rosenlegal.com 18. This sent GME's stock price rocketing. Retail investors began to take notice of the strategy, and began searching for other, similar opportunities, and the other Affected Securities, many with a high short percentage, began to experience heavy volume as retail investors interest increased. 19. Indeed, of the Affected Securities had an unusually high short interest, or number of shares that that had been sold short but not yet covered or closed out. These securities were primarily shorted by institutional investors. The following chart describes the shorted percentage of float' as of January 15, 2021, for each of the Affected Securities: With all that in mind, the SI% on January 15th was 226.42% Security Shorted Float Percentage (not official numbers yet, alleged per RobinHood lawsuit) AAL 33.75% AMC 38.12% BB 9% ВBY 82.41% GME 226.42% 20. But, on January 28, 2021, Robinhood, and other brokers, restricted trading on the Affected Securities to closing securities only. As a result of this Source: Yahoo! Finance. And the 226.42% SI was suspiciously dropped to ~30.2% following the Deep ITM CALL and OTM PUT trades which very closely mimic the procedure for hiding short positions in synthetics. GAMESTOP (NYSE:GME) SHORT INTEREST HISTORY Change from Previous Report Percentage of Float Shorted Price on Report Report Date Total Shares Sold Short Dollar Volume Sold Short Days to Cover Date 5/28/2021 11,970,000 shares $2.66 billion No Change 20.7% 1 $222.00 5/14/2021 11,970,000 shares $1.97 billion +1.3% 21.0% 0.6 $164.50 4/30/2021 11,820,000 shares $2.08 billion +6.4% 20.8% 0.5 $176.19 4/15/2021 11,110,000 shares $1.85 billion +3.8% 19.9% 0.3 $166.53 3/31/2021 10,700,000 shares $2.08 billion +5.0% 19.6% 0.2 $194.46 3/15/2021 10,190,000 shares $2.70 billion -28.2% 18.7% 0.2 $264.50 2/26/2021 14,200,000 shares $1.54 billion -13.8% 26.1% 0.4 $108.73 2/12/2021 16,470,000 shares $841.62 million -23.1% 30.2% 0.5 $51.10 So therefore with the ~1.1M CALL OI / ~1.1M PUT OI, the synthetic SI% should line up with the drop of 226.42% -> 30.2% =~196.22% With 1.1M OI that equates to 1.1M OI * 100 Shares/OI = 110M Shares worth. And with a float of 57,840,000, that gives us an estimated synthetic position of: 110,000,000 / 57,840,000 = 1.9018 = 190.18% And a grand total of 190.18% + 30.20% = 220.38% SI when accounting for the synthetics. Which is DANGEROUSLY close to the reported 226.42% SI of January 15th Total CALLS OI Opened In January Total CALLS (shares worth) Opened In January SI% On Feb 12 Total SI% (Reduction + Reported) 30.20 Float (January) SI% reduction from CALLS 57,840,000.00 1,100,000.00 110,000,000.00 190.18 220.38 Open Interest Suspicious deep ITM call volumes 2021-01-01 2021-01-05 2021-01-07 2021-01-11 2021-01-13 O 2021-01-15 2021-01-19 2021-01-21 IP|| IH| O SZ-LO- 2021-01-27 2021-01-29 T| ||| || 2021-02-02 2021-02-04 2021-02-08 2021-02-10 2021-02-12 2021-02-16 2021-02-18 2021-02-22 2021-02-24 2021-02-26 2021-03-02 2021-03-04 2021-03-08 2021-03-10 2021-03-12 2021-03-16 2021-03-18 2021-03-22 2021-03-24 2021-03-26 2021-03-30 2021-04-01 2021-04-05 FTDS, % of float](https://i.kym-cdn.com/photos/images/list/002/138/331/bf8.png "\"Well, there it is. More math/evidence pointing to the use of Deep ITM CALLs and Deep OTM PUTs to hide SI in synthetics rather than covering their shorts. This was done through buy-write trades to dodge Reg Sho Close-Out obligations.\"")
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