Look at me, I’m shorting GameStop

Motivation

TBD

The current process runs on the contract volume, contact volume with constantly raising prices will require more and more capital in the daily exchange. The machine will run out of steam very soon, I expect 50-70B capitalization of GME to short it.

Check Chronology.

Bravado how Reddit beats the Wall Street

TL;DR Reddit stormed Wall Street on GME stock and beat Wall Street. People with knowledge of how financial markets works, know that narrative is an illusion.

What is happening? There are plenty of videos, articles, podcasts that explain why so-called Reddit beats Wall Street. Well, it is not true. To understand why it is not true you need to understand what is happening with GME (and other heavily shorted stocks). This is a very primitive and high-level approximation of what is happening:

1. GME one of the highly shorted stock (>100% of traded stocks are outstanding in short position), it means that many investors (institutional and retail) borrowed the stock in “natural” form and sold it on the market with the expectation to buy it back later with lower price and return stocks in “natural” form. They expect the price to fall;
2. Reddit + other forums and platform spotted and focused the most shorted stock and publicly consolidated they decided to exploit so-called short squeeze (see definition below) short squeeze happens when a lot of short-sellers want to exit their position, but to exit it’s required to buy stocks, which drive the price up, so it is the process with positive feedback, more investors what to close short, higher price became;
3. Reddit scheme was simple and in SEC regulation is technically prohibited for institutions to exploit (but the forum is not an institution, so it is now legal), drive price up with huge positions in options (technically market manipulation):
   1. People who participated in the scheme buy all possible call options (contact with the option to buy it in the future if the price of an underlying asset will be above striking/trigger price);
   2. Call options usually have to be covered to sustain market volatility by those who issues call options, they are buying stocks at the current price to cover their possible losses with call options (technically, they “covered” the options or in general terms, they hedged against option striking losses);
   3. Why they wanted to do it with options and not to buy actual stocks? it is simple, buying 1$ worth of options contract will drive X$ in actual buy stock position in effect, where X$ > 1$. So they wanted to drive “buy” volume up;
4. As results, thousands on Reddit and thousands more on another platform when they heard about that scheme, bought tons of options, people who issue options covered them with buy orders of the underlying stock, they together drive the price up and up, the public saw an incredible daily return on GME and jumped into it, short sellers to cover their position and stop losses had been pushed to buy more stocks which drivers price up up up and now we see it. +70% +40% +100% daily on GME;

Now we understand why it happened, it is time to open eyes and see through the bravado about how they beat the Wall Street (I think people on Wall Street want to seem weak and play along with that Bravado)

Let’s ask some simple questions:

1. Who owns infrastructure?
2. Who provides pricing and control commissions and leverage?
3. Who can limit activity on a particular stock to cover losses?

I bet you know it. The biggest winner of that activity is Wall Street; why? They (so-called Wall Street) have a positive expectation of return out of every financial market action in a long run, which means raised volumes on stock and derivative trading helps Wall Street gain more on regular earning on services, commissions, robo-trades, slipped prices, etc. Beaten proverb could help with an analogy: shovels sellers and gold miners, who earned more?

We would like to focus on a small guy or gal who gains the system with a couple of hundreds of thousands of dollars at the same time when big hedge funds suffer losses. And that Wall Street is suffering. I want to tell that this narrative is an illusion. All these people who are crying about how it is unfair on CNBC they are doing it to increase viewership and Ad money flow, they want the process to continue: more money and trades in the system, is better for Wall Street (it is why they cheer any FED actions to increase the money supply, where it goes mostly? You got it.). They simply exploit typical human being quality: drama. We want drama to continue. But as most Dramas we know, it is fiction.

1. Every year hundreds of hedge funds lose more money in total than in that particular case, and it is business as usual (every decade there is another LTCM like failure)
2. Every year small gals and guys earn thousands from the stock market, not in that fashion with public bonanza, but still, the level of profits of individual investors is quite stable during phases when the market is in “up-trend”
3. Wall Street is the biggest beneficiary from raised volumes on stock and derivative trading, any increase in volume usually helps Wall Street gain more, regular earning on services, commissions, robo-trades, slipped prices, etc. (try to search, how people close the GME positions, I saw examples when people close 1.5M position on GME and receive back only 30% of profits. LOL?)

That is all about that case.

1. Wall Street is the winner, it is service provider, any increase of activity on the stock market generates earning for Wall Street;
   1. One of the examples
   2. Or direct profit from the drama
2. People loves Drama and when the underdog wins (they do not care if it is an illusion of win, it is still a win);
3. Look at the process and forces at play, it shows what is going on.

Notes: there are good descriptions of covered call options, short positions, and squeeze.

1. Call option
2. Short position
3. Short squeeze

Chronology

• 01/24/2021 - Heard about that phenomenon, and thought “It is funny”
• 01/27/2021 - Very optimistically decided to short GameStop and learned about AMC, KOSS, EXPR cases and saw GME Options Straddle
• 01/28/2021 - Reviewed the market situation and technical data points, situation is very skewed, I will wait for 50-100B cap and short then (after dropping in contract volume verification)
• 01/29/2021 - Brokers are limiting access to the GME trading
• 01/30/2021 - Wrote about my analysis of the wrong narrative that Reddit beats the Wall Street
• 02/06/2021 - Well, I did not catch top and price/capitalization never reach my target. I missed that free ride, anyhow, the lesson is very important and I will follow up that case later with some thought