What is the effect of new short sale rule?

Discussion in 'Options' started by emk662, Sep 18, 2008.

  1. emk662


    That new rule removes the exception of naked short sale for option market makers. What is the effect on options price and stock price?

  2. No change for stock price, although some argue this is a bullish change.

    When I was a CBOE market maker, when I bought calls, I sold stock to hedge the deltas. When I sold puts, I sold stock to hedge the deltas.

    If I am unable to sell stock short, I (and all the other traders) will be far less willing to buy calls and the prices will drop.

    We will all be less willing to sell puts and the prices will rise.

    Market makers who are backed by large trading firms - and that's about everyone these days - have less of a problem because those firms can find other ways to hedge the trades made by the floor trader (MM).

    To answer your question, it's possible that liquidity will suffer as a result of this rule change. But if everyone can get the needed hedges, then there will be no problem. Time will tell.