MSM outlets are just now pickng up on the post May 15 spike in Merck’s short interest. As I said on Monday, there was a move afoot — in block trading mostly — to clip Merck’s cash dividend, while insulating the trader from price moves in Merck’s stock, which could eat into the dividend expected. An uptick would be nice, but downward pressure would be. . . bad.
So, the 300 per cent increase in short positions likely reflects these traders stop loss positions. In any event, I don’t expect it will increase after tonight — Merck is now ex-dividend. Here’s what I wrote at the beginning of the week:
In order to clip the fat cash dividend off of Merck’s common shares, many institutional holders are arranging largely riskless trades in Merck. Riskless, from a stock price perspective, that is. The goal here is not to lose money on the price of the stock — while clipping off that fat Merck dividend payment right.
So, traders are buying and selling (or actually writing) both puts and calls, pivoted around Merck’s current price, agreeing that if the stock price doesn’t move at all, all they will be out is the premium. This is driving up volumes, and distorting normal market trading.