Why Did Reddit Trigger a GameStop Stock Surge?

[russ_watters]

Another wild one; down $135 or 60% so far; at about $90.

 

[kyphysics]

Mark Cuban is doing a live Ask Me Anything on WSB!

First question he answers is why GME is tanking:

Why is the stock plummeting so much?
mcuban

42 minutes ago

Supply and Demand, but in this case it literally could be because the source of demand has been crippled . When RH shut it down, then cut it back, let's put aside why, they cut of the greatest source of demand. They created a RobinHood Dive. No RH buyers, means sellers lower their price to find buyers. And they keep on lowering it till they find buyers. Keep the most natural buyers out of the market and the price keeps on FALLING.
Then that drop accelerates because the more the stock falls the more owners who bought on margin get margin calls. When that margin call happens, its brutal. They just take your stock, send you a **** you note and sell your stock at the market price, no matter how low. They just want to get your cash to pay back the loan.
That then accelerates the selling.
Which then leads to what we are seeing in the market right now with GME in particular

So what to do ?
If you can afford to hold the stock, you hold. I don't own it, but that's what i would do.
Why ? because when RH and the other online brokers open it back up to buyers, then we will see what WSB is really made of. That is when you get to make it all work.
I have no doubt that there are funds and big players that have shorted this stock again thinking they are smarter than everyone on WSB.
I know you are going to hate to hear this, but the lower it goes, the more powerful WSB can be stepping up to buy the stock again. The only question is what broker do you use . Do you stay with RH , who is going to have the same liquidity problems over and over again, or do you as a group find a broker with a far, far, far better balance sheet that won't cut you off and then go ham on Wall Street.

Of course, he's not guaranteed to be correct, but always interesting to get someone of his stature's take.

 

[phinds]

All of the reddit high fliers are down this morning. Here's the damage at 11:08am with GME and KOSS down the most by far although in terms of % down, AMC is right up there.

 

[Vanadium 50]

GME had 39M trades today with fewer than 70M shares outstanding. Interesting...

 

[kyphysics]

https://www.bloomberg.com/news/arti...ama-just-cost-one-etf-almost-80-of-its-assets
There was an article last week that some have pointed to as describing a way hedge funds might be using a "backdoor" to cover their shorts.

The XRT ETF saw massive outflows of $700M (80%). Apparently, you can redeem shares of the underlying stocks:

Theories abound as to what motivated the outflows, given that they happened alongside a nearly 20% rally in XRT this week alone. One possibility is that because XRT redemptions are delivered in-kind -- meaning that its shares are exchanged for the underlying stocks in the fund --investors are ditching the ETF to get their hands on hard-to-borrow GameStop shares. Others posit that with such a heavy weighting to the highly volatile GameStop, some holders may be choosing to take profit.

Bloomberg Intelligence analysts support the first theory.

 

[phinds]

GME had 39M trades today with fewer than 70M shares outstanding. Interesting...

There were almost 200,000,000 trades on the 22nd and 77,000,000 today (and yes, that's with only 70,000,000 shares outstanding, so there is a LOT of churning going on).

 

[Vanadium 50]

From Dow Jones (emphasis mine):

Some investors just aren't giving up on GameStop. The most actively traded options contract tied to GameStop has been a bullish call tied to the shares jumping to $800,

 

[phinds]

From Dow Jones (emphasis mine):
Some investors just aren't giving up on GameStop. The most actively traded options contract tied to GameStop has been a bullish call tied to the shares jumping to $800,

I've got a bridge in Brooklyn that I'd sell cheap to those folks.

 

[Vanadium 50]

This option is at $1.07, expiring Friday.

To give you an idea of what is more reasonable, KO (Coca-Cola) closed at $48.96. A penny buys you an option to buy it on Friday for $51.00.

Stonks only go up!

 

[Vanadium 50]

The $800 option price has fallen to 40 cents. GME is up over $100. Volume at mid-day is 30M shares - almost halfd the company.

 

[Vanadium 50]

It appears that one of the people touting the stock has been identified, a Mr. Keith Gill.

It appears that Mr. Gill is not just some guy talking to other enthusiasts on the internet, but that he is a licensed financial professional. Disclosure rules are much tighter for financial professionals precisely to avoid a situation like this.

Further, his employer is now in hot water. They are supposed to supervise all his financial activities. If they did not, that is bad for them. If they did not know because Mr. Gill failed to disclose (as he is required to), that's bad for Mr. Gill.

While the facts are still under investigation, I find it unfathomable that MassMutual would knowingly allow one of their brokers to tout a $5 micro-cap stock on social media using multiple anonymous identities. ("Why yes, that sounds like an excellent plan. Hop to it, my boy!")

 

[BWV]

From Dow Jones (emphasis mine):

Of course GME does not have to appreciate to anywhere near $800 for calls with that strike to be a profitable trade. Mar 19 calls are priced at around $5 relative to $92 underlying with about 3500 contracts open interest (so 350,000 shares). The vol in this price is a whopping 360%. The breakeven price is $172, but if GME actually was trading at $800 on 2/25 the appreciation on the position would be about 53X.

What the WSB folks figured out, is that there has to be a seller of this option and that seller needs a long position in the stock to hedge the risk - only thing worse than being short GME last month was being naked short GME calls. So the purchase of call options creates buying activity in the underlying (not to mention providing implied leverage far beyond the 2x margin limits)

 

[phinds]

Of course GME does not have to appreciate to anywhere near $800 for calls with that strike to be a profitable trade. Mar 19 calls are priced at around $5 relative to $92 underlying with about 3500 contracts open interest (so 350,000 shares). The vol in this price is a whopping 360%. The breakeven price is $172, but if GME actually was trading at $800 on 2/25 the appreciation on the position would be about 53X.

What does that mean? I haven't done options in decades and I don't follow what that might be.

 

[BWV]

What does that mean? I haven't done options in decades and I don't follow what that might be.

The implied annualized standard deviation using Black Scholes, all the other inputs are easily observable. By way of comparison, the S&P 500 implied vol is currently around 22%. The vol in the GME option is actually lower than recent realized vol, which is over 400%

FWIW since I wrote the previous post, GME is down about 30% and the option price is around $1.10

 

[phinds]

The implied annualized standard deviation using Black Scholes, all the other inputs are easily observable. By way of comparison, the S&P 500 implied vol is currently around 22%. The vol in the GME option is actually lower than recent realized vol, which is over 400%

FWIW since I wrote the previous post, GME is down about 30% and the option price is around $1.10

AH HA. I was interpreting "vol" as "volume", thus my confusion. Volatility makes sense. You can tell I haven't done this stuff in a long time.

 

[Vanadium 50]

It's possible that these $800 options are part of a complex but well-thought out ensemble of derivatives allowing these investors to take a long position on GME while carefully managing risk. Or it's possible that they are trying to massively leverage themselves because "stonks only go up!". Nobody knows for sure, but I have my suspicions.

I have a different view on "what the WSB guys figured out". They found a stock that had the name recognition of at least a mid-cap, but was so illiquid that it behaved more like an OTC stock. Further, the brand was viewed positively by a subgroup of unsophisticated investors, one that celebrates emotion over analysis. And while I am not saying it was a pump and dump, I am saying the conditions were ripe for a pump and dump, and the stock's price trajectory follows that of a pump and dump.

Oh, and it's at $55.50 now.

 

[Astronuc]

Oh, and it's at $55.50 now.

Looks like it closed at $53.36, down -$39.05, or -42.26%.

 

[Klystron]

Reminiscent of plays during the 'dot.com' bubble. Minor tech company fails to land deep pocket buyer/VC. Builds market share with catchy name, interesting plans; throw in the odd ringer, exploit tech workers who know little finance; then IPO with maximum fanfare, pump the stock up and the few cash out on top.

 

[mfb]

It appears that one of the people touting the stock has been identified, a Mr. Keith Gill.

As I said before, he never made a mystery about his position, long before it started going up. That's like saying you have "identified" a candidate for the US election - in October 2020.

 

[Vanadium 50]

It's up to $62. Because stonks only go up!

 

[phinds]

It's up to $62. Because stonks only go up!

$80+ at 10am. Others of the "reddit stocks" are also up noticeably

 

[Vanadium 50]

Clearly the fundamentals of the companies have improved enormously since...yesterday.

 

[Vanadium 50]

Let me discuss GameStop valuation for a moment. Let's compare with Best Buy, a $29B company. Best Buy is profitable and growing. GameStop is neither. I'd compare price-to-earnings, but that's not possible, since GameStop doesn't have earnings. So let's discuss price to sales. For Best Buy this ratio is about 0.65. At $73.80, for GameStop it's 0.80.

So, despite being unprofitable, somehow GameStop is 25% more valuable (per unit of sales) than Best Buy?

I think reasonable people can disagree whether the "true" value (whatever that is) is somewhere between $20 or $30 and zero. Was its 52-week low of $2.57 too low? Probably. That's probably true for most company's 52-week low. Was the $10.47/share at the end of October too low? That's debatable.

Is there money to be made by investing under the assumption GME will return to something closer to its pre-mania value? Certainly. But as a wise man once said, "The market can stay irrational longer than you can stay solvent."

 

[BWV]

Clearly the fundamentals of the companies have improved enormously since...yesterday.

Or clearly the discount rate applied to future cash flows declined

 

[kyphysics]

Aswath Damodaran (NYU Professor of Finance) - called "The Dean of Valuation" on CNBC and about as "scientific" as they come when doing fundamental analysis - gave a "best case" valuation of GME at $47.00 (for a successful turn-around story under Ryan Cohen). He said he could see a super optimistic valuation up to the $140's range (given higher revenue and higher margins - see chart), but no higher.

As a Twitter follower says, "He's never wrong." (actually, he has been occasionally, but he's rarely wrong...his inputs into his discounted cash flow analysis are always reasonable and he offers highly conservative and highly optimistic book end ranges to sandwich his moderate inputs).

I've followed him and whenever he's recommended a buy, it's almost always been very correct (netting HUGE gains). . ...FB...GOOGL...TSLA...NVDA...

If you ever disagree, he always invites anyone to use their own inputs into his spreadsheet. You have to prove him wrong with numbers.

 

[mfb]

Clearly the fundamentals of the companies have improved enormously since...yesterday.

Clearly they have enormously declined in every single day you posted updates before.

Do we need a daily update "people are still wildly speculating with GME"? Everyone is aware of that.

So, despite being unprofitable, somehow GameStop is 25% more valuable (per unit of sales) than Best Buy?

25% is a surprisingly small difference, especially for an essentially random snapshot in the middle of speculation. Take any other set of companies and you'll find tons of companies 25% apart.

 

[Vanadium 50]

Why are you in attack mode? And why have you been in this mode all wek?

Seriously. I'm with Russ here. If you have something to say, come right out and say it. You want to disagree, fine. Tell everybody what you think. Maybe you'll convince me, maybe you will convince other people, maybe you won't. But this dancing around it isn't helping communication.

Oh, and do we need a daily update? Probably not on the weekend.

 

[russ_watters]

Oh, and do we need a daily update? Probably not on the weekend.

Granted, no, not on the weekend, but otherwise I appreciate the daily updates of such an interesting/unique phenomena. I've never watched a stock ticker so much in my life; not even one I've owned.

 

[russ_watters]

I don't think that's necessarily true. There are counter-examples: loan sharking, prostitution, minimum wage.

Ok, but I thought we were talking about stock trading. I'm not interested in discussing the morality of prostitution or even video games. I realize there are people who choose to use their trading to send messages about morality, but I'm not one of them and I think they are a small minority. If that's where this is going, I don't think I can provide any insight. As I said, I know I'm not really the target audience for the original question...

But those are highly regulated. Furthermore, one cannot simply snap one's fingers and buy or sell a substantial fraction of a company.

Small numbers of large individual transactions, no, but the entire point of the past few weeks is that massive numbers of smaller transactions can substantially impact the price. On the other side of the coin, the redditors, at least at face value, believed that the hedge funds were manipulating the stock (to drop) through the combined power of their transactions. Not as much as the redditors claim to believe or as the redditors were able to accomplish themselves (to raise it), though. Ostensibly, what we had here is two sides fighting each other to manipulate the stock in opposite directions.

Indeed, the Robinhoodlums (I know it's Reddit, but I couldn't resist) noticed that because of others' positions, GME was relatively illiquid, and a smaller-than-average purchase would produce larger-than-average swing.

You give them that much credit? Hmm, I guess its possible...

A short moves the price down just as a sale does. It's a creatively financed sale. Why is one good and the other evil? ]

Again, it's the coordination with a purpose. If I sell some stock because I need the cash, I'm not purposely trying to harm the company, and the amount of harm due to my tiny sale is insignificant. If a group of hedge funds decide to short GME and the price goes down, which makes them more money which they can use to attack GME further, that's intentionally harming GME to profit from the harm. Even if it isn't directly coordinated, it is still a group of opportunistic bullies, beating-up on poor, innocent, defenseless GME.

It is it just "Rich people do it, and i don't understand it, but I know I don't like rich people, so..."

Yes, I think that's the underlying reason. The redditors believed the hedge funds were engaging in a coordinated attack against a company they liked, and that made it "bad". They were defending GME and that makes them "good". But like I said, I'm playing devil's advocate here, so you'll have to wait for one of the apparent proponents of that position to lay claim to it.

 

[Vanadium 50]

I realize there are people who choose to use their trading to send messages about morality, but I'm not one of them and I think they are a small minority.

Maybe more than you might think. There is about $250B invested in SRI (socially responsible investing) and ESG (environmental, social, governance) funds. But that's a side issue.

I think your devils advocate-ee needs to ponder a few things:

• If stocks can be said to have a price - at all - that prices needs to be able to move up and down with supply and demand. Just like tomatoes and aluminum foil.
• Companies don't go out of business because their stock prices go low. Companies go out of business because people stop buying their stuff.
• You can't put restrictions on sellers without those same restrictions applying to buyers. If you can't sell something, I can't buy it from you.

If the devil's advocate-ee believes the "Wall Street Fat Cats" were colluding, that's illegal. The solution is not to collude them right back. Especially if the evidence is "everybody just knows they done it". That's not justice. That's lynching.

In this case, I would also argue that the primary effect is to transfer wealth from one group of "Wall Street Fat Cats" to another. So if the goal is "to stick it to The Man", it's kind of a failure.

All that said, I do have a problem with short sales. What is usually described (and indeed, I described it this way) is that A borrows stock from B, sells it to C, waits, buys it back from D, and returns it to B, with a little extra for B's trouble. That's not exactly what happens. What actually (usually) happens at the retail level is A tells is broker X he wants to short, so X borrows stock from B without telling him (more on this later), and sells it to C. Later A tells his broker to buy it back from whomever, so X buys some from D and places it back in B's account. The fee that goes to B's account in the simplified scenario ends up in X's pocket.

Worse, if there was a dividend when B thought they owned the stock but it was out on loan, he doesn't get it. He gets "cash in lieu" instead. Why does he care? Usually taxes are less favorable this way.

So why would B agree to all this? It was in the fine print in his agreement to getting a margin account. If he is at the moment borrowing anything - cash or stock - from his broker, the broker can loan out his shares and keep the proceeds. Those "free" trades? The brokerage isn't working for nothing - they need to make money somehow. This is how they do it. It's legal, but it's unsavory.