Thread by @SteveSosnick

With #NakedShorting trending today, it may be useful to brush up on the mechanics of how #shorts work.

First, a refresher on how #ShortInterest can grow to extraordinarily high levels, even greater than the float. And yes, it's legal (1/)

tradersinsight.news/traders-insigh…

I watched @MelissaLeeCNBC's discussion with @timseymour and @GuyAdami on @CNBCFastMoney. Blurting "naked short" is hardly evidence that a conspiracy of #NakedShorting exists. It's illegal, and as a result most firms go to great lengths to prohibit their customers from it (2/)

Obviously because something is illegal and discouraged doesn't mean that it isn't going on somewhere. I can't prove that #NakedShorting isn't going on. But I suspect that some are confusing naked short sales (illegal) with naked options writing (legal but risky) (3/)

Here's a potential source of confusion. A @markets story quotes a Jefferies memo: "Until further notice, Jefferies Prime Brokerage will no longer offer custody on naked options in GME, AMC and MVIS". Naked options are VERY different than naked stock (4/)
bloomberg.com/news/articles/…

When you short a stock, you are required to locate someone who will lend it to you. Most firms require that in advance, specifically to avoid #NakedShorting. The stock buyer expects delivery, but they don't know if they are being delivered outright or borrowed shares (5/)

Naked options don't require a buyer. As long as your broker believes you have sufficient margin to cover your risk, the only requirement for shorting an option is finding a buyer. You are not exchanging a security, you are exchanging a promise guaranteed by the OCC (6/)

btw, if you're a holder who wants to discourage shorts you should hold your stock in a cash account. If you have it in a margin account, your broker can lend your shares - even if they're fully paid. (7/)

tldr version - I can't say that there is no #NakedShorting of $AMC stock, but I doubt that it is much. Stock shorting is arcane and poorly understood. Stock options can and are sold short, but it is legal and very risky

And I'd be remiss if I didn't include my @IBKR boss' comments on @SquawkCNBC this morning (9/)
cnbc.com/2021/06/07/int…

And here is my theory about why #OptionsTrading is seeing big demand in $AMC 145 calls. (psst, it's hedging call sales from being naked) @IBKR_TI (10/)
tradersinsight.news/traders-insigh…

Typo in #6! Naked options don't require a BORROW. They do require a buyer. Someone has to buy it. But OCC is the guarantor to the options buyer, not a lender.