August 7, 2006
Narrowing the naked short sale market maker exception to options market makers only leaves the major problem in place. Think about it, if I buy 10,000 puts then the options market maker must sell 1,000,000 shares of the underlying stock short (naked). An unlimited number of shares can be artificailly sold that will result in the price of the underlying issue falling. If you are a big enough player you can manipulate the price of a stock down. On the call side, you cannot naked buy, so the options market maker must have the shares available to purchase before selling the calls. Same should hold true on the put side, the options maker should have to locate the shares to sell short before selling the puts.