Why Did Reddit Trigger a GameStop Stock Surge?

[kyphysics]

$106.36, up 15% from that point.
You are so eager to update us every time it goes down, but when it goes up there is silence.

I'm only interested when it goes down, though. It's more fun/exciting to report.

 

[InkTide]

This is false. If your order is marketable they are required to execute it immediately.

First off, it's not really your order that executes - it's the broker's. The broker has a fiduciary duty to make your order match theirs.

The legal penalty for not honoring that duty of immediacy is not a robust enough guarantee that it will be honored when the profit of essentially lying about it and profiting in the margin of time between when you as an investor made the order and when your personal finances reflect the order's execution is so enormous compared to the penalty.

Right, so if you want to sell it now, you get the current price.

"If" does a remarkable amount of work in this sentence.

If it's non marketable, they are required to post it on an exchange, unless it's "block size" (feel free to disapprove of the block size rule, I'm not attached to it).

The issue isn't even them shirking the requirements - the problem is actually that time exists.

You cannot have an instantaneous exchange. Physics itself prevents this. Law does not supersede physics.

Even in the best case scenario, where every rule is followed to the best of the market maker's reasonable ability there is a period of time during which the transaction is pending - economic theory, especially neoclassical, has a very difficult time handling... well, time. So difficult in fact that one of the primary criticisms of the EMH is that not only does it require universality of simultaneity, which anyone on this forum should know is untenable, but it also requires that all market actors have instantaneous and universally simultaneous access to market information.

Another big problem is the EMH is circular logic in even its weak form, and yet another is that its foundations fundamentally do not accommodate the very real nature of error propagation, but the EMH is a whole other can of worms.

The settlement period of two days has no economic effect on the trade that you get.

You're right, I should have been more clear that I meant mostly the time it will take to transact, but settlement requires that asset exchanges be fully completed by that time - even honoring that cannot in and of itself guarantee that what occurred to the assets between the order and the settlement was only the relevant exchange. The economic effects on you are minimal during the settlement period, because the abuses I'm talking about there occur on a literally minute-to-minute basis before the settlement period even starts.

If they choose to internalize your transaction it's because they think it's a good trade, not because they want to manipulate the price.

Ultimately I think the problem here is assuming that their motives are the same as those of an individual doing their personal accounting, just at a larger scale.

The problem with this assumption is the motives are not scale invariant - if you are one of these big players, the fact that you internalizing can manipulate the price means that it is a tool you would be highly motivated to use... because the money from the market itself, even if you lose out on that internalization, is absolutely miniscule compared to the money you can make on the derivatives market from the price change itself.

When it a market maker receives your order, if they route out to them market they are required to give the fills they get to you.

This process is not instantaneous - the wiggle room is miniscule but it exists, and it's the reason HFT is algorithmic and highly affected by literally the geographical proximity to the exchange for simple physics latency reasons (a factor that all by itself would destroy the EMH provided the market and the transactor are located at non-identical points in space and therefore not both in violation of the Pauli exclusion principle).

So if you send an order to sell and they send a sell order to a dark pool to see if they get filled as part of handling your order, they have to give you the fill they get.

In 2 days from the order. If this were always honored, FTDs would not exist. Curiously, they do.

This is not true at all. All trades are required to be reported immediately upon execution, you can't wait.

I'm not talking about time between execution and report, I'm talking about the time between order and execution.

Payment for order flow is where they pay to get your order so they can make money by trading against you, because on average retail traders do not make money.

You've mistaken a consequence for a cause.

Market maker internalization is a competitive business. Citadel, virtu and other companies give price improvement to the orders they receive (that is, give people a better price than that market on average), and whoever gives the most price improvement gets the most flow from the retail broker.

I'm not remotely arguing that these entities are not competing with each other.

There's a surprising amount one can accomplish collectively if the competition has certain constraints, however.

Separately, Claiming anything in this industry is unregulated is kind of absurd, all that parties here are large finra regulated broker dealers.

FINRA is a private organization, not a publicly funded agency - it has been genuinely illegal for the government to regulate the derivatives markets since 2000.

FINRA is, of course, trusted to regulate itself.

This isn't true, every trade of any size is reported on the tape. You're probably thinking of the fact that odd lot *quotes* are not reported to the SIP, but they still show up in the exchanges' proprietary marketdata which many professionals pay for, so a lot of people know about the quotes anyway (that said, the sec is considering making odd lot quotes show up in the SIP feed).

Did you miss the part where I said "public" representation? If you have to pay to access the data, it is not public.

But not like, forty dollars different in a hundred dollar stock. We're talking about like pennies different.

Uh huh. We are talking about pennies of difference - but pennies of difference across the entire publicly traded economy does not add up to pennies of difference total. This is why the motives are not scale invariant: having access to huge chunks of the market makes those pennies an enormous potential source of revenue, at the expense of anyone using a broker to invest.

No, liquid means liquid. It means your can get the cash when you want it for whatever you want it.

The logical construction of these two sentences is "Not A, because B = B implies B = C."

Even ignoring A (my statement), the issue I'm taking is with B's relationship to C not being unequivocally true. Using liquid to describe cash is not the same thing as the word "liquid" being synonymous with "cash". This is why I made the distinction earlier between the common definition of "liquid" in personal finance (i.e. accounting) being importantly different from its meaning in the context of an asset exchange.

Technically speaking, the asset itself is never liquid in the overall market sense - the exchanges of the asset are, and it can depend on which direction the exchange is relative to the asset. For instance, the obtaining of a cash asset in exchange for something else is considered far more illiquid than the obtaining of a non-cash asset (or good or service) in exchange for cash. The liquidity isn't the amount of cash exchanged, it's basically the odds of the exchange actually being completed. And yes, making those odds worse does tend to increase the required volume of cash assets, and making those odds better does tend to decrease the required volume of cash, but this is a function of the relative liquidity of cash transactions tending to exceed everything else - it is neither an intrinsic property of money nor exclusive to money.

Ironically, much like the EMH, it is entirely dependent on real market activity and thus by necessity a post-hoc measurement - it pretends time does not exist.

If you bought gme for 200, and today you want to buy a house, or you want to buy a car, or pay for your kid's college, you simply do not have the same amount of money to pay for those things.

Again, "if" does a lot of work here - at least this time it's helped out by some other hypotheticals that would be relevant to liquidity if their own "if"s were true.

Not being able to trade a stock for a car (in theory this is not preventable; barter is still both legal and common) doesn't make the stock illiquid - just because local currency is usually the most liquid asset does not mean currency is liquidity.

That's the definition of liquidity, and why people want liquid assets, so they can pay for things.

People want their assets to be movable when they move those assets - it does not mean that the definition of motion is "the thing that is easy to move most of the time".

I'm sorry, you don't actually know very much about how the industry works.

Perhaps, but I think this has more to do with how little I believe what the industry says about itself.

Ultimately, the thesis of holding GME is basically a hedge against the legitimacy of the market and financial system itself. If the short positions were closed, those holding GME are more likely to forget that they hold GME than sell for a loss. The position is, in essence, "don't sell GME for a loss regardless of how long that takes", which is why even if the short positions were closed last January, it's difficult not to see this as something of a self-fulfilling prophecy given enough time. If holders believe (rather reasonably, given their assets and nonexistent debt, IMO) that GameStop is not actually in danger of bankruptcy, and they are not in immediate need of the funds spent on the stock, they don't need to exchange anything - the longer their strategy takes, the more risky any short position - even entirely backed and legal ones - becomes.

The risk to a short position is theoretically infinite - the risk to a naked short of a company exceeding the available shares if that company does not go out of business is also theoretically infinite.

The realization of that risk must, mathematically, always be to the disadvantage of retail investors, because otherwise market makers and brokers become an existential threat to both each other and themselves. If FINRA wants a cut of the profits as a fine, they're happy to oblige - just a cost of doing business.

I'd like to remind you that XRT is basically a tradable index fund for the entertainment industry EDIT: I was wrong, it's even worse - it's broader than that. Do you really think market makers, brokers, and banks following FINRA rules as if they took precedence over the laws of physics would mean that shorting an index fund for 7.15 times the volume of the fund itself is "business as usual, everything normal, nothing to see"?

Because that was last Friday.

 

[InkTide]

I'm only interested when it goes down, though. It's more fun/exciting to report.

I always appreciate when people are honest and open about their selection biases.

Your selection of a low that lasted too small a time to even appear on most online tickers is truly a testament to your commitment to those biases.

 

[kyphysics]

psssst InkTide: Your perspectives are always interesting. But, your posts are a bit long. Any chance you can review them before posting and trim if need be?

 

[kyphysics]

Couldn't agree more. I expect the Fed will capitulate and reverse course once the markets actually tank. In that case, the next few months can be seen as a great buying opportunity.

I've got some cash stashed. I think it could definitely be a great buying opportunity.

In other news, I probably bought $ZM a tad too soon ($158). I'm willing to load up more if it drops precipitously (it's $147 now - which I'm holding off on buying more of).

On top of Fed capitulation, I wonder if the Dems can use a market/economic crash to also force Joe Manchin and his corporate-bought Dem friends (e.g., Sinema) to cave to a larger stimulus plan. They ain't budging unless there is a lot to lose.

 

[InkTide]

psssst InkTide: Your perspectives are always interesting. But, your posts are a bit long. Any chance you can review them before posting and trim if need be?

First, I appreciate that you can take a jab in good humor - second, I do get carried away a bit when it comes to living up to my username (which I use all over the place, have for years).

Truth is, there are a lot of complicated reasons I hold the positions I do, and the way I think is very "analogy heavy" and abstract. It takes a lot of words to express an explanation of what I think and why I think it - and I try to avoid completely inflexible statements.

Naturally, I still make tons of them anyway...

 

[kyphysics]

Naturally, I still make tons of them anyway...

Lest I be an absolute hypocrite, I am guilty of overly long posts myself! People have complained about my rambling and long emails at work. I had to learn that people's time is valuable in the business world and they don't put up with length like in academia.

They are different worlds. I learned the hard way. Professors LOVE long emails and talks. My business colleagues think you're annoying if you do that. Although, each profession/company has its own culture. I guess it depends. But, even then, there sometimes IS JUST an overly long response too. lol

 

[russ_watters]

First off, it's not really your order that executes - it's the broker's. The broker has a fiduciary duty to make your order match theirs.

The legal penalty for not honoring that duty of immediacy is not a robust enough guarantee that it will be honored when the profit of essentially lying about it and profiting in the margin of time between when you as an investor made the order and when your personal finances reflect the order's execution is so enormous compared to the penalty.

So, what you are alleging here is widespread fraud by brokerage firms, to profit from buying/selling a security at one price while telling the client they did so at another price? Have any evidence of this?

 

[InkTide]

So, what you are alleging here is widespread fraud by brokerage firms, to profit from buying/selling a security at one price while telling the client they did so at another price? Have any evidence of this?

Correct, I am alleging - and describing as one of the core motives behind current retail sentiment around holding GME - that securities fraud both exists at scale and investor protections against it are woefully inadequate.

That it exists is not really much of a question, it does - the question is to what extent and how good are the protections, especially in the context of a law passed 22 years ago that made it illegal to make laws about the derivatives market (the derivatives market was basically destroyed by legislation seeking to prevent a repeat of the Great Depression in 1936; in the early 1990s, this legislation was, after an enormous lobbying campaign, gutted; over the next decade, attempts to reimplement it were fought with additional lobbying and ultimately defeated in 2000 with one of the most blatant examples of regulatory capture in existence). I see very little reason to believe that the extent is not enormous and the protections are perfectly adequate, especially in the context of the structural causes of the 2008 crisis and the lack of changes to that structure (and the precedent that the big players that caused the crisis in the first place get protected from the broader consequences of their own actions, creating what I described earlier as a "systemic moral hazard.")

I am also very concerned that banks have done with CLOs exactly what they did with CDOs prior to 2008 - except CLOs are mostly corporate debt. And the CLO market is much, much larger than the CDO market ever was.

As an aside, were you aware that, out of nowhere, $1.44 QUADRILLION of cryptocurrency exchange volume happened in a single 24 hour period to create that "crypto crash" on Friday?

 

[Office_Shredder]

That it exists is not really much of a question, it does - the question is to what extent and how good are the protections, especially in the context of a law passed 22 years ago that made it illegal to make laws about the derivatives market

I think the thing you linked earlier was only about otc derivatives. The cftc literally regulates derivatives. Besides, what does any of this have to do with stock trading, which is regulated by the sec. If you want to complain that Bill Clinton caused the 2008 crash, then fine, but I have no idea what that has to do with the rest of this thread.

I see very little reason to believe that the extent is not enormous and the protections are perfectly adequate, especially in the context of the structural causes of the 2008 crisis and the lack of changes to that structure (and the precedent that the big players that caused the crisis in the first place get protected from the broader consequences of their own actions, creating what I described earlier as a "systemic moral hazard.")

Do you literally believe that banks over leveraging themselves and market makers violating clearly written laws that are enforced by a regulator who exists only to enforce these laws, are the exact same thing? Like, even if the structure that permitted to let the first thing happened still exists, what does it have to do with the second thing, besides the fact that they are both "finance".

I am also very concerned that banks have done with CLOs exactly what they did with CDOs prior to 2008 - except CLOs are mostly corporate debt. And the CLO market is much, much larger than the CDO market ever was.

Fine, but what does this have to do with market manipulation or giving retail customers bad prices.

View attachment 295904
As an aside, were you aware that, out of nowhere, $1.44 QUADRILLION of cryptocurrency exchange volume happened in a single 24 hour period to create that "crypto crash" on Friday?

I have no idea what this is supposed to imply.

 

[russ_watters]

Correct, I am alleging - and describing as one of the core motives behind current retail sentiment around holding GME - that securities fraud both exists at scale and investor protections against it are woefully inadequate.

And do you have any evidence of either of those claims? (the third is an opinion)

Do you have the market data to back that declaration of majority motive/belief up?

No. Perhaps like your first claim, motive is something you can only find by polling people. However, I wouldn't have expected this to be controversial; isn't it common knowledge that Jan 2021 happened because the reddit crowd got mad at the hedge funds and wanted to try and hurt them -- regardless of the actual value of the company Gamestop? On the other end, it would be hard to believe that people who are setting the price actually believe Gamestop is worth its current market value.

 

[InkTide]

And do you have any evidence of either of those claims? (the third is an opinion)

Yes, actually. Here's the synopsis written in one of the largest communities around this now, one that is very much not r/WallStreetBets. The polling on reddit is essentially done by the community itself, and they will quite readily tell you what their beliefs surrounding the market currently are. Naturally there's good and bad, but the general sentiment of what they're doing is... kinda obvious because it's so consistent and pervasive.

the reddit crowd got mad at the hedge funds and wanted to try and hurt them

It would be more accurate to say that a group of people suspected that some of what was theorized to be a central cause of the corporate decline after the 2008 financial crisis was naked short selling, and that GameStop's stock was being artificially kept down by securities fraud in large part by hedge funds who intended to turn it into a penny stock or drive GameStop into bankruptcy so their short positions would be protected from risk by the effect the positions had on the stock. It was widely believed that COVID was being used to reinforce that position. EDIT: A narrative around COVID being poised to bankrupt GameStop - I am by no means blaming these people for COVID, it was just a good way to "short and distort."

January was a vindication of that hypothesis, but importantly it was entirely in the context of a lack of awareness that shares in a broker are "beneficially owned". The trust in the markets and market makers is predicated on things like turning off the ability to buy a stock being illegal and thus impossible. There is no way to describe market makers actively refusing to execute only one side of an exchange as anything but a complete failure of the market to facilitate liquidity.

What's happened since is GameStop hasn't gone bankrupt, nothing about the markets has changed structurally, and far more people in general are aware that they can remove a share from DTCC circulation by directly registering it. It's mostly become a movement around distrust of the DTCC and markets in general because of what happened in January last year. It is definitely motivated by hatred of hedge funds now, but only because of what they did to protect themselves when a bet that they were naked shorting GameStop happened to pay off not in their favor.

I expect the next week to be very interesting. Friday last week certainly was.

 

[russ_watters]

Yes, actually. Here's the synopsis written in one of the largest communities around this now, one that is very much not r/WallStreetBets. The polling on reddit is essentially done by the community itself, and they will quite readily tell you what their beliefs surrounding the market currently are. Naturally there's good and bad, but the general sentiment of what they're doing is... kinda obvious because it's so consistent and pervasive.

Did you mix two responses into one there? Your link appears to be answering the wrong question. I asked for your evidence of fraud in the market by the brokerage firms, not by the reddit crowd. In either case, you've been verbose to this point, but can't say more than a few words of substantiation for what appears to be your major theses? Please try again.

It would be more accurate to say that a group of people suspected that some of what was theorized to be a central cause of the corporate decline after the 2008 financial crisis was naked short selling, and that GameStop's stock was being artificially kept down by securities fraud...

Again: is there any evidence of that? Not the part about guessing what redditors believe/are motivated by, but the part about securities fraud leading to artificial suppression of GME.

Note, the SEC says there was no naked shorting:
https://investorplace.com/2021/10/s...-to-know-about-the-landmark-gme-stock-report/

Maybe I should just ask this: do you think the company Gamestop is worth $20 a share? $100 a share? Do you think it will even exist in 5 years?

January was a vindication of that hypothesis...

How so?

I'll repeat: this all sounds very hand-wavey/conspiracy-theoryish.

 

[InkTide]

I think the thing you linked earlier was only about otc derivatives.

A big part of it was essentially redefining terms to sidestep the language regarding futures trading in the 1936 legislation.

The cftc literally regulates derivatives.

And it has been functionally toothless since the legislation that I'm talking about.

Besides, what does any of this have to do with stock trading, which is regulated by the sec.

Do... do you know what the derivatives market is? Stock trading is asset trading; the derivatives markets are exchanges of contracts to engage in certain asset trades within asset trading markets. This is why they are called derivatives - they are derivative of the asset markets.

If you want to complain that Bill Clinton caused the 2008 crash

The 2008 crash was essentially caused by banks assuming that charging someone a million dollars means you will eventually receive a million dollars, and then bundling a bunch of those assumptions into CDOs with the further assumption that putting an enormous amount of those assumptions together means it is impossible for nearly all of them to be wrong.

A lot of them were wrong.

I have no idea what that has to do with the rest of this thread.

CDOs are a derivative of mortgage backed securities. They were a substantial component of the derivatives market that collapsed in 2007/8.

Do you literally believe that banks over leveraging themselves and market makers violating clearly written laws that are enforced by a regulator who exists only to enforce these laws, are the exact same thing?

It's not that they're the same thing - it's that what the banks are over leveraged into is this poorly regulated derivatives market.

Like, even if the structure that permitted to let the first thing happened still exists, what does it have to do with the second thing, besides the fact that they are both "finance".

That structure does still exist. It is quite literally the reason for bank runs being such a systemic risk. And because that overleverage is largely in the derivatives market... well, if the derivatives market is broken, so is the entire financial industry.

Oops.

Fine, but what does this have to do with market manipulation or giving retail customers bad prices.

This is where the derivatives market and HFT makes its money - trading on the motion of an asset exchange creates an entire new dimension of incentives to manipulate the price. And those are incentives in the market that banks are overleveraged into because it's the market that the entire financial industry has overleveraged into.

I have no idea what this is supposed to imply.

That is a logarithmic scale.

In the span of one of those bars - roughly 20 minutes - there was such a massive spike in volume in the market that the 24h volume would have exceeded the entire theorized value of the world's derivatives markets by nearly $450,000,000,000,000. The huge volume spike was followed almost immediately by a precipitous decline in market cap, meaning the volume was mostly selling off.

Remember when I said one of the hypotheses floating around was that cryptocurrencies were being inflated by the financial industry using them as a less regulated and more difficult to tax way to keep liquid assets? I don't know exactly what it would look like if, say, I were a hedge fund and I was using cryptocurrencies to store value and suddenly needed to load up on cash because an enormous number of FTDs around GME start to hit their deadlines for settlement next week (because they do, even according to public information)... but a huge and sudden selloff of a bunch of cryptocurrency assets late on the Friday before might look strikingly similar.

There's also a... rather large number of year-long puts for something like $0.50 a share from last January currently expiring in the GME options chain.

 

[InkTide]

Did you mix two responses into one there?

Believe it or not, yes, that paragraph answers more than one of your statements, I am trying to be less verbose.

I asked for your evidence of fraud in the market by the brokerage firms

I linked you to a community maintained resource that itself links to a great deal of

not by the reddit crowd

Are you alleging widespread securities fraud by the reddit crowd? The reddit crowd is not a market maker or broker. Their forums of discussion are entirely public and not subject to anything that could be considered a directing leadership. It's just a bunch of people who agree about something.

Or is your implication that I should implicitly and exclusively trust what the actual brokerage firms say publicly about themselves in an industry with an entire sub-industry dedicated to profiting off of selling proprietary information in a market largely 'regulated' by SROs (Self Regulatory Organizations) with minimal external oversight that has been effectively lobbied out of relevance to the discussion?

but can't say more than a few words of substantiation for what appears to be your major theses?

I gave you a link to resources. I am trying to be a bit less verbose.

If you would like for me to reproduce the entire pages of text, links, and data across the last year of posts in that community that composes the extent of what I linked to you, I'm afraid I'll have to decline and suggest you follow the context of what I linked to whatever extend leaves you satisfied it is either reasonable or not.

Again: is there any evidence of that?

See above.

Not the part about guessing what redditors believe

I'm not guessing, their posts rather explicitly lay those beliefs out if you actually read them.

but the part about securities fraud leading to artificial suppression of GME.

Basically, the theory was that GME was nakedly shorted and being hit by a COVID-reinforced "short-and-distort" campaign, as well as internal manipulation by board members within GameStop that had publicly prominent ties to the theorized entities shorting the stock (more a corporate fraud thing than securities fraud, but super difficult to prove and helps the whole thing along immensely). According to that theory, the price of the stock was far below market value, but more importantly the obligations of a short position meant naked shorting created the potential for a short squeeze.

Then the short squeeze started to happen, and it was bigger than anyone expected - and market makers/brokers started to take the very clearly illegal step of shutting off one direction of the exchange.

Maybe I should just ask this: do you think the company Gamestop is worth $20 a share? $100 a share?

It's basically unknown at this point - because the buy buttons were shut off, and because such a large short position is hypothesized to exist, GameStop stock price has become less a function of the value of the company and more a function of whatever the derivatives market is doing with it.

That has always been the risk that derivatives markets pose - a complete divorce of stock price from the fundamentals of its asset value.

Do you think it will even exist in 5 years?

Yes. They have no outstanding debts, a huge amount of assets, and a decent cash flow. They are mostly finished internally restructuring, and building infrastructure to enter into an emerging digital market as well as in general becoming more of a tech company. I find it very unlikely that they are in danger of bankruptcy within the next decade.

How so?

The rate of the squeeze and absolute horror of Wall Street establishment that it had happened caught even the bullish WSB members by surprise - the fact the squeeze happened meant that they were absolutely correct in their theory that a squeeze could happen (because that was the extent of their thesis at the time).

The hatred for hedge funds, brokers, and market makers alike arose from the fact that the stock was blatantly manipulated to stop the squeeze from happening (the fact multiple brokers made trading GME one-way, sale only, is not an indicator of a healthy market) and regulators did basically nothing.

I'll repeat: this all sounds very hand-wavey/conspiracy-theoryish.

I've provided plenty of text for you to cherry pick through, surely you can do better than that.

Besides, if it is "hand-wavey/conspiracy-theoryish", the evidence should simply make that evident by demonstrating that the market is functioning and its facilitators and regulators have created a system without flaws of note.

There is nothing accomplished by weasel-wording an accusation that the act of noting potential problems is a conspiracy theory. It's entirely possible my belief is wrong - but finding that out is science. Calling it hand-wavey is not.

 

[kyphysics]

$87 LOL

 

[InkTide]

$87 LOL

This guy quite literally follows the daily trading trends of GME specifically, if you want something to listen to to tell you the minute-by-minute price actions from the perspective of a professional day trader (he does a lot of options trading).

 

[InkTide]

Note, the SEC says there was no naked shorting:

This (specifically section 3) raises significant issues with the SEC report, including simple term definition errors (like accidentally replacing the word "volume" with "value" for volume-weighted average price - there is no such thing as "value weighted average price").

Here's a video going over a 2016 SEC report describing the ways naked shorting is suspected to be hidden using ETFs. Note the SEC report on GameStop specifically identifies the GME ticker and not the 106 ETF tickers that contain GME shares.

 

[kyphysics]

This guy quite literally follows the daily trading trends of GME specifically, if you want something to listen to to tell you the minute-by-minute price actions from the perspective of a professional day trader (he does a lot of options trading).

Nah. I just like watching the "low of the day" price action. I'd have to be nuts to follow it on a play-by-play level.

I mean...mayyyyyybe if I owned the stock...even then, I'd probably not follow price action that closely. I'm mostly a value investor, so I don't care what happens to the price over the next 3-5 years. I just buy and hold. If it goes down, I buy more...traders fret every second...I fret every 3-5 years.

 

[InkTide]

Nah. I just like watching the "low of the day" price action. I'd have to be nuts to follow it on a play-by-play level.

I mean...mayyyyyybe if I owned the stock...even then, I'd probably not follow price action that closely. I'm mostly a value investor, so I don't care what happens to the price over the next 3-5 years. I just buy and hold. If it goes down, I buy more...traders fret every second...I fret every 3-5 years.

That's actually pretty close to verbatim the position of people investing in GME - "buy, hold, directly register to pull the share from DTCC circulation." They just happen to be following price action as well.

The only price actions they change positions to are drops, which they respond to by buying more - that's why I think this is something of a self-fulfilling prophecy even absent the ample evidence that the price has been manipulated. Anyone with short interest above 0 is up against a contingent of retail GME value investors that are dead-set on buying and holding every single GME share in existence to make covering the short impossible, and never selling unless and until a short squeeze happens.

Also, holding for a long time means you may want to consider figuring out who the transfer agent of the related security is, to prevent your own shares from being lent out for legal short selling (how short selling is supposed to work - though personally I still consider it a flaw in market structure even in its legalized form).

 

[kyphysics]

 

[gleem]

Well maybe the "little guy" inflicted some pain on some pro's but according to the WSJ the pro's raked in the dough.

https://www.msn.com/en-us/money/com...the-gamestop-revolution/ar-AATgc4A?li=BBnb7Kz

One should always remember, "You should not get into a micturating contest with a skunk."

 

[Astronuc]

Somewhat related to the Reddit influence on short sellers

How a Columbia professor became the scourge of activist short sellers​

https://finance.yahoo.com/news/columbia-professor-became-scourge-activist-100856402.html

 

[bhobba]

Somewhat related to the Reddit influence on short sellers

Now I am learning about options from professionals (I joined SMB Options Tribe, which has a lot of professional options traders and is run by the head options trader at SMB Capital); you realize the whole thing is simply mad - even madder than I thought before. All you have to do is buy an in the money put. Options are just contracts - it has zero effect on the stock itself. You also learn about LEAPS which are options that act the same as shares (except you do not get dividends) but at a much lower price. Trading options usually takes about 15 minutes a day - if that. It can be as low as a minute a week. There is a minority of options traders that use options for day trading. I think they are mad, stressed out and will burn out early. But each to their own I suppose. SMB has many day/swing traders, and very very few can make big money. Most 'just' make a good 6 figure income - maybe double what I got in today's dollars working as a programmer for the government or what contractors not attracted by the security of government work get. The superstars are very few, and SMB is always on the lookout for them. They even offered me a tryout. I laughed my head off - and politely said no. Although it is all part of their business model which is interesting but way off-topic.

Note that some options traders are not exactly Lilly white. There is the story of Karen - the so called Super Trader:

https://investormint.com/investing/how-karen-the-supertrader-blew-up

All the strategies she uses are well known and legit. I use one myself called an Iron Condor with profits taken at 25%. It lasts on average 22 days and wins 92% of the time with a profit of $274. But that 8% loss really hurts - it is $1347 each loss. To mitigate that a bit before it expires you have a look at if it is in loss or close to it. If so it is easy to convert to what is called an Iron Butterfly which at a 1% profit target is $15 profitable 92% of the time - but the losing trades only lose $73. So overall you only have a 3% chance of a loss of $73 and an average profit, without doing the exact calculation of about $250 in around 22 days. These are typical profits that can be made with strategies options traders use - not the massive profits Kathy made which should have been a red flag something was wrong.

Thanks
Bill

 

[StevieTNZ]

Now I am learning about options from professionals (I joined SMB Options Tribe, which has a lot of professional options traders and is run by the head options trader at SMB Capital); you realize the whole thing is simply mad - even madder than I thought before.

Have you made enough money in order to buy me Updown Court -- https://en.wikipedia.org/wiki/Updown_Court ?

 

[bhobba]

Have you made enough money in order to buy me Updown Court -- https://en.wikipedia.org/wiki/Updown_Court ?

Seriously though anybody that claims they can quickly get that sort of money from options is either pulling your leg or lying. When you start about 20% is possible. That's my level right now. After years of experience you can make the returns of this guy:

https://real-pl.com/

To cut to the chase it is about 3.9% a month or about 60% a year. You may think - wow that's great - I should do it. Well, I think all advanced investors should (Warren Buffett does it all the time) but let's be clear about the actual profits being made here. YOU MUST PAY TAX. Buy and hold you do not. Here in Aus the maximum tax rate is 45% - so this is equivalent to 33% buy and hold. Well, you think - that pretty hard to do. Have a look at the Hedgefunge passive portfolio:



Things are not always what they seem in the whacky world of investing. I could say more but this forum is not really about investing, although a discussion of Mathematical Finance such as the math of options etc would be on-topic. I may do post/paper on it.

Thanks
Bill

 

[BWV]

Short vol strategies like the iron condor are like picking up pennies in front of a steamroller - you can make consistent, seemingly above market returns but the gamma risk can wipe you out if vol spikes like it did in 2018’s volmageddon or in March 20. If everyone could make 20% per year trading options, then why don’t they? More importantly, who are the suckers on the other side of the trade willing to give you these sort of returns? You really think you can win in a zero sum competition against professional traders/algos over the long term as a part time dilettante?

 

[jrmichler]

Back in the 1980's, I studied option strategies. I convinced myself that a conservative low risk approach would give me returns comparable to CD's, but at higher risk. I have not touched options since then.

 

[bhobba]

If everyone could make 20% per year trading options, then why don’t they?

Well, Warren Buffett does them all the time. Once you learn about puts and picking shares up at bargain prices many people indeed buy shares using puts. The reason most do not emulate Warren Buffett is simply the average investor doesn't know about it. And even if they did many couldn't be bothered. An Iron Condor is a defined risk strategy - you can't lose more than your margin which is, for that trade on the index, about $1500 - and what you mention occurs very rarely.

There are plenty of people that trade options quite profitably - not massive amounts of money unless you have a big bank - but it is not hard to do OK. And as you get more experience 60% is not out of the question. It is not done with an Iron Condor though. They are beginner strategies. A better strategy that works regardless of market direction is a delta neutral Broken Wing Iron Butterfly. An example is the following on the S&P index. Sell a 20 delta put and a call at the same price. Go 50 points down from that price and buy a put. Buy a call above that price so the trade is delta neutral. You take profits at about 1%-1.5% of the premium. You see how it works as you step through each day looking at the t+0, t+1, t+2 etc lines. It initially starts out narrow and flat, but after each day it gets slightly less wide but higher. It does not take much for the profit to be a small amount like 1% or 1.5%. It has over a 90% win rate from my backtesting and the backtesting of its inventor. He also has traded it for 5 years confirming its profitability. It returns about $50 on $500 dollar margin. He has a better trade, but I can't reveal its details except again my and the inventors backtesting over the last 10 years plus his trading it for 5 years confirms it is profitable. Have a look at the real profit and loss in the link I gave where the details of his account balances are given. The trade is called the 5 step.

A popular trade invented by Seth Freudberg whose overall strategy can be revealed is the so-called Rhino:
https://www.smbtraining.com/blog/rhino

Here is the profit and loss:
https://www.smbtraining.com/blog/wp-content/uploads/2018/07/SMB-Rhino-Backtest.pdf

Thanks
Bill

 

[bhobba]

Back in the 1980's, I studied option strategies. I convinced myself that a conservative low risk approach would give me returns comparable to CD's, but at higher risk. I have not touched options since then.

I gave it my like. Many people in retirement use covered calls on shares they own at 10% delta, which rarely gets assigned. If it does, they have made a big profit on a stock they will likely eventually sell anyway since they are retired. Some don't want to sell and buy back the call for a loss. A test ran using it with $250k on SPY shares to create income to live off showed to make it work; you would need to reinvest 50% of profits and occasionally make use of margin:

It is debatable if it performs better than the 4% rule unless you are willing to take on more risk. It certainly is not set and forget.

Thanks
Bill