stock market on Tuesday, topping even mega-cap companies like Tesla and Apple, according to Deutsche Bank. GameStop was the single most traded name in the U.S. Short seller Andrew Left of Citron Research said Wednesday he has covered the majority of his short position in GameStop at a loss. Amid the massive squeezes, Melvin Capital closed out its short position in GameStop on Tuesday afternoon after taking a huge loss, the hedge fund's manager told CNBC's Andrew Ross Sorkin. GameStop continued to rocket higher as retail traders showed no signs of letting up. The stock jumped on the announcement on hopes Cohen would drive a change in strategy. 11, when news broke that activist investor and Chewy co-founder and former CEO Ryan Cohen is joining GameStop's board. The rally in GameStop was initially triggered on Jan. The short covering tends to fuel the stock's rally further. However, when the stock jumps sharply higher, it forces short sellers to buy back shares in order to limit their losses. As the stock price falls, the trader would buy it back for less money, pocketing the difference. Some also believe this buying frenzy could be an ominous sign for a market at record highs.Ī short seller borrows shares of a stock and sells these borrowed shares to buyers willing to pay the market price. The intense speculative behavior among retail investors is unnerving many on Wall Street as mounting losses by hedge funds could spill over to other areas of the market. The retail crowd is not just taking over the shorts and it's taking over the headlines." "It is a pack of traders and the pack is gaining momentum. "This is gaining cult-like status," said Quincy Krosby, chief market strategist at Prudential Financial. These passionate investors often call out short sellers in the chat room in colorful language and unpleasant internet memes. Many enthusiastic Reddit users have been posting screenshots of their brokerage accounts, some of which touting astronomical returns north of 1,000% in a handful of days. "You combine the power of technology, which allows you through Reddit postings to magnify your individual impact, with some use of leverage and very targeted bets, they can have a significant influence, particularly on areas of vulnerability because of the short positions," Paulsen said. The mechanics of this trade our outlined here: The GME Gamma Trap."Retail investors with the help of technology acting as a union in attacking is a new phenomenon," said Jim Paulsen, chief investment strategist at the Leuthold Group. We believe this was a strong reason as to why GME stock dropped from >$200 down to $60. If call sellers begin to show up in earnest, that can allow the market makers to sell long stock hedges. This similar chart below shows the options in implied volatility terms, and you can see that the cost of call options (blue dots) rose well past that of put options (orange dots). Last night with GME stock closing near $100, the cost of an option was nearly 3x that of the last time GME was near $100. The thin blue line shows the price of GME stock (right axis). Each dot represents a different expiration date, with an option strike equal to where the stock last traded. You can see this below, where we show the cost of at the money option (left axis). Yesterday though options prices rose dramatically, surging past relative levels from similar GME price jumps. This demand was primary to the initial options gamma squeeze, as we detailed in our previous analysis. implied volatility) rose to very high rates, but it did not seem to deter call buying. This in turn may mean that marker makers risk and hedging requirements declines.ĭuring the last price jump the cost of options (i.e. The primary method options market makers have of deterring option buyers is to raise the costs of options, which should start to limit demand. The main reason for this is that we think options market makers are going to be much faster to raise the price of options. It is likely to be a challenge for GME to reach & sustain similar price heights as before (>$200).
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