>>>What happens when you write a call, get assigned, and there are no shares available to borrow? Do you just have to buy them in immediately?<<
You basically have no choice but to buy them in. Sometimes your brokerage can look outside the firm and scrounge some up.
This happens all the time - about once a quarter to me. It isn't a big deal. There are no penalties, demerits, etc associated with the call w/o shares to borrow. If you don't act, your broker will just do it for you - probably about three days after exercise.
About six months ago, I was assigned with expiry, went down my list to buy in, and bought them in on the Monday following expiry. I missed one. On Wednesday about noon, I saw an order entered on my StreetSmart screen. And then it executed. I called Schwab that quickly to inform them that their computer was generating random orders and that there was great danger to the world's financial markets as a result. They politely informed me that the margin department had generated the order as a result of my "naked short." This boo-boo was profitable since my "naked short" had dropped since exercise. I got to keep the profit. No muss. No fuss. Of course it could have gone the other way.
It is up to the brokerage to crack down on its wayward clients. Schwab doesn't fool around.
Naked shorts can destroy a corporation, and I have seen what I can only construe to be hedge funds shorting imaginary shares.
The SHO (naked short) rule has been tightened and enforced more rigorously. My understanding is that it is still a joke.
Per Wiki:
Naked shorts
Naked short selling is simply a case of short selling the shares without first arranging a borrow. The Securities Exchange Act of 1934 stipulates a settlement period up to three business days before a stock needs to be delivered,[2] generally referred to as "T+3 delivery". Traders can use naked shorts in the case where they felt there was a reasonable opportunity to make the borrow some time during the settlement period, allowing them to sell at an advantageous time in the market and leave the clerical matters until a later date.
If the stock is illiquid or simply has a small number of outstanding shares, finding the borrow might be difficult to arrange. In these cases the trader normally arranges for the borrow before making the trade, just to be sure. In the case when a borrow cannot be arranged within that time period and the shares cannot be given to the buyer, the trade is considered to have "failed to deliver", a bothersome but relatively benign clerical problem under normal conditions.[3]
More recently, a number of companies have been accused of using naked shorts in order to make profits at the expense of share prices. To do this, the trader simply enters a naked short with no intention of ever returning the shares.[3] A large enough short sale could cause the price to fall, as is the case with any stock being sold, so as long as the trade is large enough to move the share price, the short is likely to be profitable. Normally this would be risky; if the price did move back up for other reasons, the trader would be driving the price up with every purchase, a condition known as a "short squeeze".[4]
But as long as the buyer turns around and shorts it back into the market, the price continues dropping, making the trades profitable even though no one actually holds any of the shares.[3] The SEC states that "Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity." However, naked shorting to drive down share prices violates the law.[5]
"Legal" naked shorting would normally be invisible in a liquid market, as long as the short sell is eventually delivered to the buyer. However, if the covers are impossible to find, the trades fail. A sudden rise in number of fail reports will alert the SEC that something irregular is going on. In some recent cases, it was claimed that the daily activity was larger than all of the available shares, which would normally be unlikely.[3]
The North American Securities Administrators Association (NASAA) held a conference on naked short selling in November 2005. An official of the New York Stock Exchange stated that NYSE had found no evidence of widespread naked short selling, and alleged "fear mongering that there's this rampant naked shorting that's gone unregulated." Cameron Funkhouser, NASD senior vice president of market regulations, noted that although companies have alleged stock manipulation through the Berlin stock exchange, the NASD has seen not one instance of naked short selling [on the Berlin stock exchange]". Ralph Lambiase, head of the Connecticut Securities Agency and the NASAA, declared his disappointment at how the industry was handling the issue as a whole.[citation needed]
A report issued in early 2006 found no evidence of naked short selling in US markets, despite allegations from many companies.[6] The SEC's short selling FAQ also cites common misconceptions about the practice, such as the belief that naked shorting causes "phantom" shares to enter the market, as one source of confusion over the practice's market effect. Naked short selling, the SEC said, would not increase a company's shares outstanding shares nor result in "counterfeit shares."[1]
Statistics on failures to deliver securities are sometimes used as evidence of naked short selling in specific stocks. However, the U.S. Securities and Exchange Commission stated in January 2008 that "fails-to-deliver can occur for a number of reasons on both long and short sales. Therefore, fails-to-deliver are not necessarily the result of short selling, and are not evidence of abusive short selling or 'naked' short selling," [7]
en.wikipedia.org |
