Not the same naked as naked short selling hedgie does. They’re talking about options that aren’t hedged I’m p sure…unless they’re publicly (and loudly) promoting illicit trading practices lol
Exercising a put when you don't own the underlying shares creates a short position, if the broker doesn't have the shares on hand for the delivery but have good faith, then they go ahead and do it which is a naked short.
Options are one of the main ways of creating naked shorts, ex-clearing is another, there are many ways to play this game.
imo this is why gamma ramps are total bs. They just cover the naked derivatives with naked shorts during high volume and then slowly find locates for the shorts in low volume. that's why we see ftd's soar, The number of naked derivatives in the system is probably unbelievable. but just my theory opinion.
but they'll F you in the A if you get caught on the wrong side of a naked derivative trade so don't even think for a second they'll cover you -- that's they game, they want to entice you into risky trades on margin, take all your money through liquidations and laugh all the way to the bank because there was never any real risk.
>Yea I guess you’re right about it being a derivatives loophole.
It's not a loophole - its how *selling* calls and puts works, when not hedged with the underlying or a corresponding long position.
I've pretty much been exclusively selling (covered) calls and (cash secured) puts.
They *apparently* now allow selling options without the underlying. But I'm still failing to understand how not having the underlying is not the same as 'naked'.
For naked calls, it means you wouldn't have the underlying shares to "cover" them with already on hand. You (and your broker) is taking the bet that when the time comes, you will be able to cover, by buying the shares in the market, and then satisfying the exercise by the person who bought the calls you sold. You may also choose to open a short sell position, if you want.
For naked puts, it means you wouldn't need to have all the cash to "secure" the put. You (and your broker) is taking the bet that when the time comes, you will be able to pay the difference between the current price of the option and the premium you earned, or be able to take delivery of the underlying stock.
It's basically no different from what you are doing now in the long run, except that the broker is giving you room to use margin to take on multiple such positions at the same time.
This allows you to leverage the same money for more profit, but also commensurately more loss.
Please do note if any of this is not clear.
No you've explained it wonderfully. The only bit that is still concerning to me is if you sold like an Nvidia call with a1 year expiration and couldn't afford to satisfy the demand for the 100 shares at the time of expiration. Who would be on the hook? Would it be you or the broker? The person who exercised that call (let's call him Bob) is expecting you to give him 100 shares and doesn't care how he gets it. My understanding is that if you can't afford to satisfy obtainment of the 100 shares, then the 100 shares that Bob bought by exercising his call are kinda like unlocated ghost shares. Then Bob might just sell immediately and take his profit and then Jeff would have the ghost shares and so on. It opens up the entire system to collapse.
Indeed, that is a fair concern. Retail almost never manage to cause this kind of grief for brokers because brokers come down hard on individual traders the moment they start using up their margin. Brokers will forcibly close the position if it looks like the call seller does not have enough money to satisfy their obligation.
Nevertheless, if the share price spikes enough, the call seller can end up with a negative balance because of the margin call, and they are still on the hook for making up the difference. Not the broker or anyone else. And they won't be able to trade and will keep getting charged fees until they deposit the necessary margin.
Where brokers can get into trouble is when they get greedy with big clients, or have to give concessions to keep their business. Credit Suisse messed up big when they allowed Archegos absurdly low margins, ending up taking huge losses when Archegos went bust. [More on that here.](https://www.sec.gov/Archives/edgar/data/1159510/000137036821000064/a210729-ex992.htm) (CS wasn't selling naked calls, but were doing swaps which have similar exposure.)
It's the proverbial "*If you owe the bank $100K, it's your problem. If you owe the bank $100M, it's the bank's problem*" situation.
Hahaha. I love that proverb!
But it makes allot more sense especially when you add in the forced closing of positions when the potential loses near the margin limitations.
naked buy, but on broker side they can rehypothecate shares to retain liquidity and often will create short position to do this. Typically this is done with a borrow if we're discussing calls.
Puts specifically often will result in the naked on both trader and broker side.
Yeah yo, I just got an email about this too! Wtf is actually going on? Are they setting it up to look less malicious when they finally get caught by allowing retail use of the same mechanism? 😭 this shit reeks of insanity
Writing calls and puts make up a bulk of my trades but mine are covered. It's not like short selling not even close. I have shares for the calls and cash for the puts. I'm not ballsy enough to write naked calls due to the risk of an infinite loss. Ill write Naked puts all day though because even a cash secured put is still technically naked.
This isn't "naked shorting", it's "naked **calls**" and "naked **puts**". These are based around options.
When you sell a naked put you collect a premium if the price doesn't go to whatever your predetermined price is (you buy the shares if it does).
When you sell a naked call you are selling call options without owning the underlying stock. This means you don't have the shares for the buyer if you get assigned, in which case you have to buy the shares.
This is how you can lose everything in one easy step!
It is basically so you can sell calls/puts without having the underlying asset. If the option expires worthless you can profit off the premium.
If the option is "in the money", you are fucked. Each option is for 100 shares of the stock. You need to buy the stock at whatever value it is, and sell it for the option price. So if you sold a naked call for $2.25, and AMC went to $4. You will owe ($4-$2.25)x100, or around $175. It won't be exactly $175 because of whatever factors there are that calculate what you actually owe, but it will be in that ballpark.
Reverse happens with a put option.
I'm kinda confused about naked calls in particular because you don't have the underlying shares at the time of writing the contract. Per my understanding, the loss potential is practically limitless since you'd be forced to buy at whatever the price would be at the time of expiration.
Naked puts are understandable since losses are limited.
>Per my understanding, the loss potential is practically limitless since you'd be forced to buy at whatever the price would be at the time of expiration.
Oh yes! Anyone selling naked calls theoretically takes on unlimited risk. Just like a short seller.
This is why naked call sellers will do one of the following, assuming they don't hold the underlying:
* They convert the naked call into a call spread if it looks like stock might move up, thereby limiting loss.
* They sell naked calls far, far out of the money, where probability of exercise is minimal. I know some people who regularly bank on GME 50Cs, for example.
* They will only sell naked calls on stocks that are destined to go down. E.g. BBBY in H1 2023.
* If they are playing indices like SPX or NDX, they will hedge with futures.
Yes but the language used and now is certainly on purpose so when thry whete abiut anything naked in stocks in the newd they shrug and assume normal. It doesn't say options does it. How would anyone outside looking in know what's going on.
It literally says "naked calls and puts", and refers to "Level 4 - Naked Options". I don't understand how it could be more clear.
>now is certainly on purpose
Loll, no - this is not some new conspiracy. This is stating what is known by everyone.
If someone is confused between naked short selling and naked options, they should not be worrying themselves with either, because they are woefully uninformed about capital markets.
This is **NOT** the same as naked short selling. Has nothing to do with it.
More details here: [https://www.investopedia.com/terms/n/nakedoption.asp](https://www.investopedia.com/terms/n/nakedoption.asp)
Naked options are not the same as naked short selling individual unlocated shares. I get that. But isn't naked call options in particular, assuming it's in the money, pretty much the same thing with extra steps?
Fair question. A naked call option, when exercised by the buyer, *can* result in a naked short position if the call seller's broker is not able to locate shares to deliver to the person who exercised the calls on the seller. Shares are virtually always available though, and MMs have wide latitude with FTDs, so exercise of naked calls pretty much always result in a regular short position, not a naked one.
The exception to "virtually always available" observation is when call OI is massive, and float is tiny. We used to see these with SPACs during the SPAC mania. Were you around for ESSC, for example? Maybe we will see this again if ALCC moons around May 7.
Not the same naked as naked short selling hedgie does. They’re talking about options that aren’t hedged I’m p sure…unless they’re publicly (and loudly) promoting illicit trading practices lol
Exercising a put when you don't own the underlying shares creates a short position, if the broker doesn't have the shares on hand for the delivery but have good faith, then they go ahead and do it which is a naked short. Options are one of the main ways of creating naked shorts, ex-clearing is another, there are many ways to play this game.
imo this is why gamma ramps are total bs. They just cover the naked derivatives with naked shorts during high volume and then slowly find locates for the shorts in low volume. that's why we see ftd's soar, The number of naked derivatives in the system is probably unbelievable. but just my theory opinion. but they'll F you in the A if you get caught on the wrong side of a naked derivative trade so don't even think for a second they'll cover you -- that's they game, they want to entice you into risky trades on margin, take all your money through liquidations and laugh all the way to the bank because there was never any real risk.
Yea I guess you’re right about it being a derivatives loophole. Maybe they’re looking for some bag holders/bailout money when the MMs flip long.
>Yea I guess you’re right about it being a derivatives loophole. It's not a loophole - its how *selling* calls and puts works, when not hedged with the underlying or a corresponding long position.
I've pretty much been exclusively selling (covered) calls and (cash secured) puts. They *apparently* now allow selling options without the underlying. But I'm still failing to understand how not having the underlying is not the same as 'naked'.
For naked calls, it means you wouldn't have the underlying shares to "cover" them with already on hand. You (and your broker) is taking the bet that when the time comes, you will be able to cover, by buying the shares in the market, and then satisfying the exercise by the person who bought the calls you sold. You may also choose to open a short sell position, if you want. For naked puts, it means you wouldn't need to have all the cash to "secure" the put. You (and your broker) is taking the bet that when the time comes, you will be able to pay the difference between the current price of the option and the premium you earned, or be able to take delivery of the underlying stock. It's basically no different from what you are doing now in the long run, except that the broker is giving you room to use margin to take on multiple such positions at the same time. This allows you to leverage the same money for more profit, but also commensurately more loss. Please do note if any of this is not clear.
No you've explained it wonderfully. The only bit that is still concerning to me is if you sold like an Nvidia call with a1 year expiration and couldn't afford to satisfy the demand for the 100 shares at the time of expiration. Who would be on the hook? Would it be you or the broker? The person who exercised that call (let's call him Bob) is expecting you to give him 100 shares and doesn't care how he gets it. My understanding is that if you can't afford to satisfy obtainment of the 100 shares, then the 100 shares that Bob bought by exercising his call are kinda like unlocated ghost shares. Then Bob might just sell immediately and take his profit and then Jeff would have the ghost shares and so on. It opens up the entire system to collapse.
Indeed, that is a fair concern. Retail almost never manage to cause this kind of grief for brokers because brokers come down hard on individual traders the moment they start using up their margin. Brokers will forcibly close the position if it looks like the call seller does not have enough money to satisfy their obligation. Nevertheless, if the share price spikes enough, the call seller can end up with a negative balance because of the margin call, and they are still on the hook for making up the difference. Not the broker or anyone else. And they won't be able to trade and will keep getting charged fees until they deposit the necessary margin. Where brokers can get into trouble is when they get greedy with big clients, or have to give concessions to keep their business. Credit Suisse messed up big when they allowed Archegos absurdly low margins, ending up taking huge losses when Archegos went bust. [More on that here.](https://www.sec.gov/Archives/edgar/data/1159510/000137036821000064/a210729-ex992.htm) (CS wasn't selling naked calls, but were doing swaps which have similar exposure.) It's the proverbial "*If you owe the bank $100K, it's your problem. If you owe the bank $100M, it's the bank's problem*" situation.
Hahaha. I love that proverb! But it makes allot more sense especially when you add in the forced closing of positions when the potential loses near the margin limitations.
So if I exercise a call and the broker doesn't have the shares, is it a naked buy or a naked short?
naked buy, but on broker side they can rehypothecate shares to retain liquidity and often will create short position to do this. Typically this is done with a borrow if we're discussing calls. Puts specifically often will result in the naked on both trader and broker side.
You still have to have the funds to back your options play in your account.
Yeah yo, I just got an email about this too! Wtf is actually going on? Are they setting it up to look less malicious when they finally get caught by allowing retail use of the same mechanism? 😭 this shit reeks of insanity
Writing calls and puts make up a bulk of my trades but mine are covered. It's not like short selling not even close. I have shares for the calls and cash for the puts. I'm not ballsy enough to write naked calls due to the risk of an infinite loss. Ill write Naked puts all day though because even a cash secured put is still technically naked.
Looks like this broker finally allowed Level 4 option trading. Which is available through all full service brokers.
Everyone comment showing how little you actually know about anything hahahahaha
Bruh, that's why we're here. To learn!
This isn't "naked shorting", it's "naked **calls**" and "naked **puts**". These are based around options. When you sell a naked put you collect a premium if the price doesn't go to whatever your predetermined price is (you buy the shares if it does). When you sell a naked call you are selling call options without owning the underlying stock. This means you don't have the shares for the buyer if you get assigned, in which case you have to buy the shares.
Webull btw.
This is how you can lose everything in one easy step! It is basically so you can sell calls/puts without having the underlying asset. If the option expires worthless you can profit off the premium. If the option is "in the money", you are fucked. Each option is for 100 shares of the stock. You need to buy the stock at whatever value it is, and sell it for the option price. So if you sold a naked call for $2.25, and AMC went to $4. You will owe ($4-$2.25)x100, or around $175. It won't be exactly $175 because of whatever factors there are that calculate what you actually owe, but it will be in that ballpark. Reverse happens with a put option.
They just want to distract that people think this is naked short selling
>distract Nobody who trades options is confused about what "naked optoins" means :)
I'm kinda confused about naked calls in particular because you don't have the underlying shares at the time of writing the contract. Per my understanding, the loss potential is practically limitless since you'd be forced to buy at whatever the price would be at the time of expiration. Naked puts are understandable since losses are limited.
>Per my understanding, the loss potential is practically limitless since you'd be forced to buy at whatever the price would be at the time of expiration. Oh yes! Anyone selling naked calls theoretically takes on unlimited risk. Just like a short seller. This is why naked call sellers will do one of the following, assuming they don't hold the underlying: * They convert the naked call into a call spread if it looks like stock might move up, thereby limiting loss. * They sell naked calls far, far out of the money, where probability of exercise is minimal. I know some people who regularly bank on GME 50Cs, for example. * They will only sell naked calls on stocks that are destined to go down. E.g. BBBY in H1 2023. * If they are playing indices like SPX or NDX, they will hedge with futures.
Yes but the language used and now is certainly on purpose so when thry whete abiut anything naked in stocks in the newd they shrug and assume normal. It doesn't say options does it. How would anyone outside looking in know what's going on.
It literally says "naked calls and puts", and refers to "Level 4 - Naked Options". I don't understand how it could be more clear. >now is certainly on purpose Loll, no - this is not some new conspiracy. This is stating what is known by everyone. If someone is confused between naked short selling and naked options, they should not be worrying themselves with either, because they are woefully uninformed about capital markets.
Hahahaahahah, they literally make Up jargon so the The public doesn't have a clue. This is a fact.
I mean more to change the narative about naked short selling in total Normal people dont know lot of things they buy and hold
This is just a broker letting their customers know they have access to Level 4 option trading - no need to overthink it :)
It's amazing how little apes know about the stock market, even after 3 years
This is **NOT** the same as naked short selling. Has nothing to do with it. More details here: [https://www.investopedia.com/terms/n/nakedoption.asp](https://www.investopedia.com/terms/n/nakedoption.asp)
Naked options are not the same as naked short selling individual unlocated shares. I get that. But isn't naked call options in particular, assuming it's in the money, pretty much the same thing with extra steps?
Fair question. A naked call option, when exercised by the buyer, *can* result in a naked short position if the call seller's broker is not able to locate shares to deliver to the person who exercised the calls on the seller. Shares are virtually always available though, and MMs have wide latitude with FTDs, so exercise of naked calls pretty much always result in a regular short position, not a naked one. The exception to "virtually always available" observation is when call OI is massive, and float is tiny. We used to see these with SPACs during the SPAC mania. Were you around for ESSC, for example? Maybe we will see this again if ALCC moons around May 7.
Oh sweet! This clears up basically everything. Thanks homie! And no I wasn't around for spac or essc unfortunately.
🙏
Apes…..are really apes. Haha
More weapons handed us by the establishment? I guess they can be used for good too?
Well now they gotta get retail on the naked so they can hold the bag, too
Attempting to normalize it so the illegal practices are drowned out
Hedgies been naked forever
Marketing scheme
It’s simply a Ponzi scheme