How Borrowed Shares, Naked Options, and Short Squeezes Differ

# What's the difference between shorting "borrowed" shares and "fake" shares


# What's the difference between shorting "borrowed" shares and "fake" shares












Like it or not, millions of people are now looking to r/wallstreetbets for not only memes but to view shared investment research.

I've learned a lot about stock options in the past year, but I'd like to quote a "due dilligence" post on wallstreetbets claiming GME was shorted 33,000,000+ non-existent shares and it's illegal or should be. It talks about a certain number of borrowed and non-existent "fake" shares.

In the post he cites this article on counterfitting stocks

From my understanding of options, this doesn't make sense.

To short a stock, you

A: sell to open a call option contract, making the agreement that if the stock closes on X date above Y value, you'll sell the buyer 100 shares at Y value. You're betting these terms wont be met and you'll take the buyer's money, paying them nothing in return.

B: buy a put option contract, making the aggreement that if the stock closes on X date below Y value, the seller will buy 100 shares from you at Y value.

C: Is there any other way?

Both of these scenarios create a short position, often done in combination with other options as part of spreads.

In both of these cases, let's say there are 1,000,000 shares and you're taking a short position equal to 2,000,000 shares via selling to open calls. It seems to me if you lose that bet, you can meet your obligations by buying 1,000,000 shares and selling them to fill half of your obligations, then re-buying them and selling them at the agreed upon price. Financial suicide? Yes. Illegal? No.

Isn't this what people mean when they talk about hedge funds buying shares to cover their short positions? And the huge demand drives up the price creating a "short squeeze" (rise in price)? Does such a scenario damage the market? It is something bad that shouldn't exist?

## Answer by JoshK (score 2)

https://quant.stackexchange.com/a/61421

First, remember that only anyone who sells a naked call or put will get market to market and have to put up cash as it moves. The market makers who do the bulk of the trading will never sell an outright, naked option. They will always hedge with the actual stock. So you might be buying a put, but the person selling it to you is going to sell a share of the underlying stock to hedge.

Secondly, The article that you linked to throws a lot of terms at you but is misleading in many ways. The way the sytem works today every sold share will be located from a lender. That means that if you go to your E-Trade , or TD, or whatever, and sell stock X - they have sourced those shares from a long holder. That is a strong legal requirement and people get it trouble if they break it.

The DTCC and NSCC are just computer systems for facilitating the delivery of the shares, nothing else. If you don't have a locate for the shares the system won't magically get it for you.

If a broker doesn't have a locate then the stock won't come in from the DTCC/CNS. Then you get an extra day or so to find it. If you can't find it you (the dealer) has to buy it! And then the dealer can get "put in the box" where they will be prohibited from lending that name for a while. Dealers are very careful because it will cost them customer business if they can't short a name when their competitors can!

## Answer by user42108 (score 1)

https://quant.stackexchange.com/a/61395

C: Is there any other way? - yes, borrow the shares and go short.

Does such a scenario [short squeeze] damage the market? It is something bad that shouldn't exist? - how do you define that?

re B - your options could be cash-settled. Doesn't necessarily affect the seller's hedging strategy, just pointing it out.