You probably think it's a good idea to take "speculators" out of the oil market. More government messing around with the market is NOT what we need... the only thing you're going to get from that is drier markets with more volatility... Short sellers are a vital part of the market... they provide liquidity if you want to buy, and they take profits when everyone else is in a panic... [it's always nice to have someone to sell to when the stop is dropping...] By implementing regulation that limits a trader's hability to play half of the market [the short side...] you dry up liquidity... On the other hand... making an exeption for options MM's is BS... It's ok to have them be able to play a riskless game by giving them the tools to hedge properlly... but they should NOT be the only ones with those tools. The less distorcions you add to the market the better it'll determine prices... markets go down sometimes... that doesn't mean you have to make a law to make it go back up... The governments only worry should be to enforce delivery of short shares. That's the only measure that can warranty that you don't have naked shorts. Put aggressive fines on FTD's and enforce the law. Any further measure to make the market go up 'till the election... is only going to make matters worse in the long run.
You seem to have in mind hedging of direction (delta). If that is the case, then they could also hedge by selling the underlying short synthetically at other strikes and expiration. Could you comment on this? I have my opinion on the implications of hedging at other strikes, and also I think I know where one needs short and long stock for hedging. You above comment (so far) shows the usefullness, but did not yet proof the necessity of short undelying.