NanoViricides Inc. (NNVC)

[JG36]

1) Can you provide a source or link to any information on the use of covered calls by insiders?

2) Are there restrictions on insiders being able to use their shares in derivative instruments, particularly options? Links or sources would be nice.

3) What are the sources of shares for backing of options? How typical is it for brokers to use naked options?

If an insider has a sale restriction on his stock he would not be able to sell covered calls on the shares, for the simple reason that if the calls are exercised he wouldn't be able to meet his obligation to sell the shares. In theory it might be able to sell naked calls (with the corresponding margin requirement) but I suspect that isn't allowed either, as it amounts to an insider betting that his shares won't go up, something that is frowned upon. I once held restricted shares in a company I worked for and was not allowed to buy protective puts on those shares for the same reason. (Too bad -- the stock tanked.)

Brokers don't hold option positions. The other side of your option trade is generally taken by an option market maker. The OMM never holds a naked option, which is tantamount to making a bet on which way a stock will move, something OMMs never do. They delta hedge their option book by buying or selling shares in the underlying instrument to maintain a zero delta. So if you buy an at-the-money call (delta 0.5) the option market maker who sells it to you hedges by buying 50 shares of the stock. If the price goes up (increasing the delta of the call) the OOM buys more shares. If the price goes down (decreasing the delta) the OOM sells shares. The OOM gets his shares the same way you do, by buying and selling in the market. Of course he does high volume and pays lower brokerage fees than you would. Also, although I could be wrong on this, I believe that OOMs are not subject to short restrictions on stock.

Buying a stock and hedging by buying married puts is equivalent to buying calls instead. It is cheaper and simpler just to buy the calls (fewer brokerage fees and one less bid/ask spread). Likewise shorting a stock and hedging by buying calls is equivalent to buying puts instead, and it is cheaper just to buy the puts.