How likely is it for them to close their position when the price hit so high? That would be a huge loss. Why not wait a bit, make a few desperate phone calls and leverage their power before that?
Because of the expiration date of the short they sold and uncertainty over whether the price would continue to increase.
If you have to buy by EOD Friday and the price starts skyrocketing Thursday, you might want to buy a little earlier even if it means eating a huge loss, because you don't know if that skyrocket will continue into the next day.
Shorts aren't options, they don't have expiration dates. You can hold a short indefinitely just by paying interest on the borrowed share value when you entered the position. You can even keep the short from being forcibly closed during a squeeze by providing more collateral.
Put options do expire, but the worst case for puts is that they expire worthless. Regular shorts can have unbounded losses.
I have to admit I'm missing something in this story. If the shorts do not have to sell, what's the endgame for WSB? Is it just the margin requirements will be too high, thus forcing lots of them to close their position? I see lots of references to the short squeeze happening tomorrow, so there must be something that force people to settle their position tomorrow?
What happens when the party you borrowed the stock from, seeing the new high price, wants to sell it to cash in on the fever? Can they not force close the position if the price moved up by some threshold?
The other commenter is right that shorts have unlimited risk, and put option are defined, but they can technically be short by selling calls which would make them expire-able.
But honestly I doubt it was even possible to be short so much with options alone on such a low cap company (as it was before this blew up)
> They didn't tell you how much of the position they closed out on. They can say "they closed their position" even if they only closed out on 1% of it.
There is no ambiguity in what "closing the position" means. Stating on CNBC that you have closed the position when in fact you only bought shares to cover 1% of your short would put you in jail.
Your mental model for how the world works is wrong.
The thing the SEC is going to take issue with is lying to investors. Investors have a right to know what's going on with their money.
And despite how it seems from outside Wall Street, hedge funds are definitely scared of the SEC. Banks worry less because their money is sourced differently. Hedge funds have to worry about legal action not just for the fines but also for scaring their investors. When individual investors are so large it only takes a few redemptions to significantly impact AUM.