Right, seems like a similar problem to banks and leverage. People can short more in aggregate than exists the same way the money multiplier exists for banks. But there are bank runs and it's built on trust, so that's risky too and we make people hold on to a certain amount to cover what they lend.
I guess I'd just prefer they use call options to cover the shorts instead of borrowing. No leverage or multiplier effect there. Gets too high, just execute the call. Am I also missing something there?
So, first of all, the net shares outstanding are still 100. All the extra, whatever, 200 shorts are balanced out by 200 extra longs, and that creates obligations between them, which must be managed as usual (collateral, margin calls, risk limits, ...)
To short a share, you must borrow and sell it.
If you buy a call, you're long. You could write a call and then you'd have short exposure, indeed, but on the wrong side - you lose on the way up, while you want to win on the way down. So, you could buy a put - that makes you short, winning on the way down. However, now the entity that wrote the put is long, and will generally cover their exposure by - shorting. No magic bullet there.
I guess I'd just prefer they use call options to cover the shorts instead of borrowing. No leverage or multiplier effect there. Gets too high, just execute the call. Am I also missing something there?