The AMC Short Squeeze | The Naked & Synthetic Short Disaster

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hey everyone me kevin here a lot of

folks are very interested in

understanding the short squeeze for amc

and

out of our research for the short

squeeze for amc

comes a lot of terminology including

naked shorting synthetic shorting

puts vs calls folks it can be

overwhelming

so in this video i want to give you a

monday june 7th

update on exactly what the latest short

information is

and what the trends are for amc we're

not only going to look at the short

interest data but we're actually going

to look at

some put cull ratios and explain some

other topics as well

but first i want to give an explanation

of what the different methods are

for shorting a stock so first things

first we know that you can short a stock

by borrowing it and then selling it and

in the future repaying it

this is very simple we don't need to go

super deep in this

you could just picture this very simply

if amc is let's say a hundred dollars

today and you have a bunch of amc shares

i go to you and i go hey you mind if i

borrow your amc

shares like i'll pay you 10 interest or

50

interest just depends on what the market

prevailing rate is to keep things simple

let's just say 10

interest i'll pay you 10 let me borrow

that those shares that you have

for a while so i'll borrow a thousand

shares from you and then i'll take those

hundred dollar shares and if i want to

short them i just instantly

sell them that obviously puts downward

pressure on the market because there's

more selling activity

a hodler is getting paid interest and is

getting promised that

that person is getting their shares back

but in the meantime rather than that

person hodling

somebody's borrowing them and dumping

them onto the market

obviously that pushes prices down that's

the nature of short selling and the

argument for a short seller is hey if i

can take

dollar stock and short it short it all

the way down to say thirty dollars

and then i'll just buy it back at thirty

dollars

now i'll give those same shares back to

the person i borrowed them from they're

worth less

but i'm giving them the shares back that

same thousand shares back i borrowed

perfect i profit seventy dollars

times the thousand shares so 70 grand

that's just basically short selling

minus the fact that now i have to pay

interest right okay

we know that that's very very basic but

it gets a little more interesting

see that's basic short selling now let's

talk about naked short selling which is

another type of

short selling which is oftentimes

considered to be

illegal but there are a ton of loopholes

which basically mean

it's not really illegal take a look at

this so this is a report

from a stanford and here it indicates

the sec being the commission

in 2009 the commission adopted a rule

which requires that

fails to deliver in all equity

securities be promptly closed

out failed to delivers among other

things may be

indicative of potentially abusive naked

short selling

so basically how this works is you call

up your broker just to make this simple

and go yo fidelity hit up my account

right now for a million shorts on amc

right now please thank you very much

okay just charge my account the interest

thank you bye

and the broker has a responsibility to

make sure they can actually get

a million shares to sell so they have to

borrow those shares from somewhere they

have to identify those shares and they

have to sell them

but sometimes that takes two or three

days and if after two or three days that

person was

essentially shorting the stock but

in settlement time the stock never

existed technically that person still

gets a gain for shorting the stock

and the brokerage failed to deliver

those shares

which is a big problem this is like an

interest-free way

of manipulating and gaming the system

and so that's why we have this here

naked shorting which is not illegal per

se occurs when a short seller does not

borrow the securities in time to make a

delivery

the brokerage does not borrow the

securities sellers may intentionally

fail to deliver as part of a scheme to

manipulate the prices

and so that's when it becomes illegal is

when brokerages are not doing this by

mistake

but they're on purpose like yeah yeah

let's just let's do that let's short and

let's fail to deliver them

and this is a way to essentially avoid

those high borrowing costs which

borrowing costs are pretty high

on for example amc right now data

indicates that since the fall of 2008

fails to deliver have declined blah blah

blah okay great

but a lot of folks believe that naked

short selling is illegal

but the sec actually has a document

specifically on this

in a naked short sale the seller does

not borrow or arrange to borrow the

securities

in time to make delivery to buyer within

the standard three-day settlement

the brokerage as a result the seller

fails to deliver securities to the buyer

when delivery is known as

failure to deliver or fail failures to

deliver

may result from either a short or long

sale there may be legitimate reasons for

a failure to deliver for example human

errors or mechanical errors

sure a fail to deliver may also be the

result of a naked short sell

for example market makers who sell short

thinly traded illiquid stocks in

response to customer demand

may encounter difficulty in obtaining

securities

when the time for delivery arrives so

this is really

a loophole for the brokerage to just the

brokerages to say hey look

our customer called us and said they

wanted to short a bunch of amc stock

we want to take care of this customer so

we enabled their short sale

but then we realized the stock was

really illiquid uh there there weren't

shares available to be borrowed

the share utilization was near 100 like

it has been for amc

until today now it's at about 90

utilization so there more shares

available for shorting

and boom you have a naked now people say

this elite is illegal but folks

literally if you go to the sec.gov it

literally says right here

naked short selling is not necessarily a

violation of the

federal uh security laws or commission

rules indeed in certain circumstances

naked or short selling contributes to

market liquidity

they're basically saying like this it's

almost like the

sec i don't want to draw judgment so can

you draw your own judgments here but you

can see when you actually look into it a

little bit deep

in more detail like for example look

this is this is why i make videos and

this is why hopefully

you give me a subscribe uh if you just

type in naked shorting

into google and you go to investopedia

it says naked shorting is the illegal

practice of short selling

well apparently it's not given that the

sec literally says

it's not uh and they talk about how

they're actually cases where

naked short selling is good for example

broker dealers that make a

market in a security generally stand

ready to buy and sell security on hand

for a regular basis

blah blah blah blah this may occur

sudden okay this may occur for example

if there is a sudden surge in buying

interest

like in amc or if few investors are

selling the security at the time a lot

of haulers

because it may take time for the market

maker or may take a considerable amount

of time for the market maker to purchase

or arrange to borrow security

a market maker engaged in bona fide

market making particularly in a

fast-moving market

may need to sell the security short

without having arranged to borrow the

shares

this is especially true for market

makers in thinly traded illiquid stocks

as there may be few shares available to

purchase or borrow at a time bing

go so you can take this out it's

literally

key points on regulation regulation

s-h-o and

it is under the what is a short cell uh

definition tab of the sec's website

so uh you know okay yeah

naked short selling happens now the cool

thing is

uh well it's not really so cool because

the sec is like super slow on it

but the sec does give you data on how

many failed to deliver

there are this is a chart of the failed

to deliverance for amc

unfortunately it takes about a month for

us to get this data

and so over here on march on may 10th

for example so it goes to may

on may 10th for example we could see

that 3.6 million shares failed to

deliver for amc

but if we go to weeble on may 10th

so let's go to amc we're going to go to

the day chart

and we're going to go out to may 10th

which is right here

we're gonna see that there was volume of

38

million shares so that's actually a

sizable portion

that means literally on may

10th almost 10 of the shares

that traded that day failed to deliver

that's that's some serious naked short

selling right there right

that's an issue unfortunately we don't

get that data

in more recent times or or close to when

we have these sort of market movements

because the scc has a 30-day you know

sort of time frame to give us that

failure to deliver data or fail to

deliver data

which is pretty freaking annoying but

anyway that's naked short selling so you

have regular short selling and then

naked short selling

then you have synthetic shorting

this is basically done with options so

remember if you want to make money in a

stock

you could buy the stock or by buying

shares

or you could buy a call option

a call option is not actually buying

shares of the company

a call option is just you having a

contract giving you the right to buy

shares at some point in the future and

the value of that contract which is

derived off of the value of the share

price

hence derivative that value fluctuates

oftentimes much more

than the value of the shares fluctuate

you get much more fluctuation

in options this makes sense so you buy

that derivative or a call

when you want to make money as the stock

goes up but if you want to make money as

the stock goes down

you buy a put that's when you start

making money as the share price goes

down

okay great so what is a synthetic

short well a synthetic long is

buying calls a synthetic

short is buying puts and if you want to

do

a solid synthetic put strategy or a

synthetic

short strategy what you can actually do

is you can

sell at the money calls and you can

buy at the money puts so let's say amc

is at 60

right now this strategy says that you

agree

to deliver shares of amc to somebody at

sixty dollars

with your sold call if the share price

is more than sixty dollars

so you take potential unlimited risk

that way

and you make money if the share price

goes below sixty dollars

this is considered a synthetic short

because you're making money

when the price of the stock or the share

price goes down

and you have unlimited risk because

you've sold at the money calls

which you can do naked which means you

don't actually own the shares

so if amc goes to 400 and your call

comes to expiration and you have to

provide those shares you have to

potentially provide an unlimited amount

of shares

to fulfill that call option at 60 for

someone else right

this is a synthetic short that does not

show up

in short interest data because it has

nothing to do with the shares

we know that short interest data is just

a way of determining hey

how much as a percentage of the shares

that are trading on the market right now

as a percentage of float

how much of those or what percentage of

those are actually

short and that's pretty easy i mean you

could use or text for that

you could use the bloomberg terminal for

that uh there there are plenty of tools

to determine what the short interest is

of something

for example here's the s3 partners it

says that right now we're at 14.91

short as a percentage of float so that's

the short interest

but these synthetic shorts the options i

just talked about those don't actually

show up

in the short interest calculation then

there is yet another way that you could

short

and this has to do with total return

swaps then we're going to get to a

bottom line here

so total return swaps this is when you

essentially deal with

something known as a synthetic prime

brokerage it's synthetic prime brokerage

trading

and so here's the way this works let's

say you want a short amc you think amc

is going to go down

instead of borrowing the shares and then

dumping them you get a total return swap

where you're paid an interest rate for

agreeing to compensate the brokerage if

amc goes up so let's say amc is at 60

and you think it's going to go down well

you could go to a brokerage and say hey

i'll pay you whatever amc goes up so if

amc goes to 100 i'll pay you that 40

but i don't think it's going to go to

100 i think it's going to go down so i'm

going to

i want you to pay me an interest rate i

want you to pay me 10

or whatever and i'll compensate you if

you go if it goes up

if it goes down hey i don't have to

compensate you anything and i get paid

the interest rate

that's another way to bet against amc

and guess what happens in this example

if you set this up the brokerage is like

great we're paying this interest rate

but what if amc goes down we need a

hedge

to make sure we don't lose money in the

event amc goes down

so guess what the brokerage does it

shorts the stock

so if it shorts the stock and the stock

goes down it doesn't lose

all of its money paying all this

interest now this could potentially

contribute to naked shorting

so this is how you get this cluster of

of this

combination of all these different ways

that you can combine

shorting a stock so you have regular

shorting which is you borrow the shares

and you dump it

you have naked shorting which

technically isn't

illegal but it just happens uh in sort

of illiquidity events

but that naked shorting can dampen

the ability for a stock to actually run

when it should

it just tends to happen shorter term

like brokerages try to clear those out

asap

otherwise they're going to get in

trouble by the sec so regular shorting

naked shorting

synthetic shorting is options uh and

then you have swaps

now we can measure we've seen the things

we can measure so far

are we can measure how many shares are

available

to borrow this helps us and we've seen

that more shares have become available

to borrow so there's actually more

liquidity at amc as of june 7th right

now

we've gone from 99 utilization to like

89 to 90

utilization so more shares are available

to borrow in addition to that

the short interest on amc is actually

going down

last week we were at 20 to 18 percent

now we're at 14

so you've got share availability is

up which means probably less naked

shorting because

shares are available to be borrowed so

they don't you don't have as many issues

locating shares to borrow you have

short interest that's down and

you can look at synthetics by looking at

the put

call ratio and what we're seeing over

here

is you do have an elevated level of

buying puts

so this is the put call ratio is

basically just you divide the amount of

puts there are

by the amount of calls there are

outstanding at any given time this is a

chart from today

and it tells us that right now we're at

an elevated you know we're more puts

than we are at calls

which the break-even points obviously

0.5 it's the put to call ratio

so we have more puts than calls right

now but we're not really seeing this

skyrocket

kind of like we did in early march or in

january

this is when we really had a lot of put

pressure

or a lot of put pressure over here sort

of in mid-march

these are these are times where people

are really setting up those longer term

put positions

right now we're not really seeing that

spike and this is this is today's date

uh in in the put call ratio here so

all right bottom line what are we seeing

well now we understand

uh a lot more about the different kinds

of shorts that exist

if you like this content obviously make

sure to subscribe but

so far we are seeing a little bit of a

trend down in the amount of shorting

that's happening

we're not seeing the massive spikes that

we saw in january in march

for put volume we're not seeing that

same

massive spiking in short interest data

as we are uh or what we saw in in even

january or earlier because for example

here i can show you this

we could go back year to date on the

short interest chart

and i'm getting a little there we go you

can see we're

you know we're not at all time lows we

have gone down to about 10.88 percent

here

but we're definitely lower than where we

have been so does that mean the squeeze

is getting squeezed is today the day we

start seeing that transition where the

squeeze is getting close

or is this just the beginning i don't

know and quite frankly it doesn't matter

to me because i'm hodling over 75 000

of amc shares and i don't really care if

it goes down

i might buy more in fact i will buy more

if it gets down to a certain level

if it goes up great but i'm hodling for

at least a year as i promised

this just gives you some more insight

into some of the trends that i see

happening in the market right now

and if you found this helpful make sure

to subscribe thank you very much for

watching and folks we'll see you next

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