Twenty-one days versus three for everybody else. But it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share).
> it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share)
This is called a reset transaction, and it is not permitted.
Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is
unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the
short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying
the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the
shares in the market, Trader A might next enter into a trade that gives the appearance of
satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain
its short position without ever delivering on the short sale. Most often, this is done through the
use of a buy-write trade, but may also be done as a married put and may incorporate the use of
short term FLEX options. These trades are commonly referred to as “reset transactions,” in
that they have the effect of resetting the time that the broker-dealer must purchase or borrow the
stock to close-out a fail. The transactions could be designed solely to give the appearance of
delivering the shares, when in reality the trader has no intention of meeting his delivery
obligations. The buy-writes may be (but are not always) prearranged trades between market-
makers or parties claiming to be market makers. The price in these transactions is determined so
that the short seller pays a small price to the other market-maker for the trade, resulting in no
economic benefit to the short seller for the reset transaction other than to give the appearance of
meeting his delivery obligations. Such transactions were alleged by the Commission to be sham
transactions in recent enforcement cases. Such transactions between traders or any market
participants have also been found to constitute a violation of a clearing firm’s responsibility to
close out a failure to deliver.