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The person shorting has to pay a borrowing cost to the owner of the share. This is variable (based on lots of things) but it's around 30% per annum for GME right now (and that's against the current stock price, not the price the share was when it was borrowed). This is paid until the share is returned to the original owner.
The cost of carry is lessened by the interest on the cash paid for the security sold. (In theory, there is a relative parity between the repo rate and the cash interest rate, depending on risk etc...)
We don't know the tenor / maturity of the repos that Melvin bought to cover their short position - if they bought long maturities, they're not going to be paying a coupon on the current price, but the purchase price.
If they are buying rolling short-term repos, then they are, as you say, paying a massive amount away.
The lender / repo seller, however, can make margin calls - I'm guessing this is what Blackrock has done. They can see the price shooting up, and their credit risk guys are shouting out that Melvin is breaking limits, and need to cover the debt.
This is where Citadel comes in with a financing deal that helps themselves to a chunk of Melvin's portfolio (for cheaps) and an interest in stopping other people making their new portfolio tank any further (through blatant market manipulation and other dirty dealings).
whoever sold that call option is in deep deep shit
Whoever sold that very out of the money call option (hence the cheapness of it) would have hedged themselves properly, both in the underlying at the time, and the volatility as soon as it started to look a bit funky, over a year ago. Come expiry, they may have to faff about a bit to make sure that they stay delta hedged, but it's not going to be a huge concern.
Market makers got burned by the Goldmans of this world 10+ years ago when it comes to out of the money options.
(Caveat - I'm rusty af on all this stuff)
NotThamesWater-
Whoever sold that very out of the money call option (hence the cheapness of it) would have hedged themselves properly, both in the underlying at the time, and the volatility as soon as it started to look a bit funky, over a year ago. Come expiry, they may have to faff about a bit to make sure that they stay delta hedged, but it's not going to be a huge concern.
Just a curious (and almost totally ignorant) bystander... can you explain this in simple terms please?
This is fun to watch and all, but surely at some point everything goes back to normal... the kids on Reddit who sunk their student loans into this loose their nerve, everyone begins to sell, the stock crashes back to normal levels, the hedge funds make all/most of their money back by shorting on the way backdown and a ton of kids caught up in the hype loose their savings?
ewanmac
Shorts don't have any expiry.
The person shorting has to pay a borrowing cost to the owner of the share. This is variable (based on lots of things) but it's around 30% per annum for GME right now (and that's against the current stock price, not the price the share was when it was borrowed). This is paid until the share is returned to the original owner.
So, if there are 60mm shares being shorted and the share price is $300 then that's $6.3bn per year in borrowing costs, or about $17mm a day across all 60mm shares. So that's roughly $0.25 per share per day for the shorters.
Options (calls/puts) DO have expiry dates. New options become available each week on a Friday and will cover a range of time spans. But it means that each Friday a bunch of options will be expiring. There are about 100,000 options that expire today, mostly on the buy side, so that's definitely going to be more petrol on the fire.
So today there will be a bunch of people who bought call options who might want to exercise them today or lose that option forever. Lots of these will have been bought when the price was way down ($50 or below) and so it would be stupid not to exercise them as it means you buy a number of shares for a pre-determined price (I think the highest call options for GME expiring today are for $110 or so, no idea for puts) and then you can immediately sell them for instant profit (finding a buyer on the open market does not seem tricky given everyone wanting to pile in).
On the other side whoever sold that call option is in deep deep shit. Either they have covered their position earlier (before the price rocketed) and bought shares that they can hand over, or they now have to buy on the open market (~$300+) in order to sell to someone at $110 (or lower in many cases).
DFV bought a call option to buy 500 blocks of 100 shares (so 50,000 shares in total) at $12 at any point before April 16th. Doesn't take much to work out the profit on that. Whoever sold those calls is properly fucked (unless they can short it on the way back down to make the money back, hence the feedback loop GME is stuck in).