Option Market Maker short selling exception

Discussion in 'Wall St. News' started by nitro, Aug 29, 2008.

  1. nitro


    The other day, SEC chief COX stated that they are looking into revoking the option MM short selling exception.

    If so, it would kill options. Here is a trivial example. Due to put/call parity, it would be next to impossible, certainly impractical, to sell calls above parity or even at parity. Why? Because MMs wouldn't be able to short the stock (overnight, we can short intraday). We would have to sell the stock and then exercise the call that night and no one will do that for parity.

    But what about just selling a put? I guarantee you that no MM on this planet would sell a naked put without being able to hedge it (unless the sale of the put balances his book.) That means that the only way a MM would make markets on puts is in (ratio) spreads (even this has problems), and the vanillas themselves would go very wide. I can't even begin to think of the ramifications of all this.

    Imo, this is crazy. The law that you need to pre-locate stock is the correct one.