Excellent article on understanding reverse conversions in seeking alpha by IV member Tom Shaughnessy's Instablog
Great article explaining reverse conversions for option dummies like me. Fairly wonky but the best I have seen yet. google: "Mysterious Trading Dynamics With VirnetX" sorry $#@@%! Yahoo won't let me post the link.
"The short seller is long the stock, long the put and short the call. The short seller has no exposure until he sells his shares in the market, thus affecting the price. Even though the short seller can affect the price negatively, if the price were to rise he would have to go into the market and purchase shares to cover the call that became naked when he sold the stock he received.
At this point those short have to (as discussed earlier) go into the market and purchase stock to deliver against the calls that were exercised. The number of shorts, coupled with the number of shares they would need to purchase, and mixed with a buying raid to cover their positions would lead to a massive increase in share price. Its one thing to have a normal market of buyers and sellers with a stock price that goes up in value, but its another when every short seller has to cover their then naked calls when the market maker exercises the calls against the short seller's naked call position."
You guys know I watch the trading pretty carefully and always on the lookout for Reverse conversion. Only problem I see is the MM's and the shorts never seem to run out of creating shares. Its going to take a very large buyer to keep buying shares causing the shorts to finally throw in the towel and cover. On the other big bear raids there were probably still shares to borrow but it appears there are no shares to borrow hence all the conversions of late. I would suspect and bet that many retail that have been holding may sell some into a $10 rally adding to the available shares to short. Much of all this is speculation on what may happen. If the old timers hold on then there will be very few shares for the shorts and only phantom share created or option plays will help push vhc down after this antisipated good news is released. We can speculate all we want but in the end only the shorts know what thier plan is and how long they will hang on....JMO Disclosure I am still very long and havent sold any shares and have added to my calls.
This is a great explanation and should cause a grave concern for those long the stock. To know that shorts are not even remotely concerned that there could be a short squeeze would make my head spin if I were long the stock. I couldn't fathom taking a shot like that if I weren't certain of the outcome. Therefore, it's my opinion the shorts are very certain of the outcome. Given all the delays and other hurdles facing VHC, it's hard to argue against the short position.