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.
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.
e: Why is that downvoted?
Put options do expire, but the worst case for puts is that they expire worthless. Regular shorts can have unbounded losses.
https://www.investopedia.com/ask/answers/05/shortmarginrequi...
Melvin Capital's short position was in the form of puts, I think.
Since they would expire worthless, better to sell them when it is skyrocketing than to wait and see it skyrocket further and lose all of your money.
This is incorrect.
[1]: https://www.institutionalinvestor.com/article/b1q8swwwtgr7nt...
You don't need an "emergency infusion of 3 billion dollars" if you just bought put options that are now deep OTM. As you mentioned, the total downside is capped at 100%.
They clearly had real exposure and serious panic. If they were using put options they were leveraged or had non-standard terms (not the same as typical retail investors)
If it were just puts, then their exposure to a run-up would have been 55 million, not billions. Puts can only go to zero. The filing merely hinted that they were shorting the stock because they also had some puts on it.
Think about it, if you buy a $9 put for $10, the most you could lose is $10 when the stock goes way above $9. The unlimited loss scenario with options is writing (selling) a naked call, where you receive a premium but if the stock price rises above the strike price your loss rises.
Melvin's position must have been mostly short equity. Perhaps only a few million shares of a $3 stock.
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)
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.
Is it equally illegal to say on CNBC that you closed it out, but to email your investors and tell them you didn't?
Is the legal issue that you're misleading your investors or that you're manipulating the market? Both?
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.