YOLO - GameStop, BlockBuster, Bed Bath & Beyond, AMC

Gamma Trading: What’s happening to GameStop, BlockBuster, Bed Bath & Beyond and AMC

Past week 3 of my friends were asking my point of view on whether to trade on GameStop, BlockBuster, Bed Bath & Beyond, or AMC. I advised against each trade. You might be wondering what was my reasoning. The answer was simple, It was already too late for the opportunity. However, each individual wanted to go YOLO. It’s funny because I had the same conversation separately with each person. No worries, I will not disclose your name 👉😂

However, I’m reminded each of them, that they were doing “YOLO Trading”. YOLO trading is just hopping along for the ride because you are seeing other people do it and you want in on the action. For you boomers or gen Xers, YOLO means, “You Only Live Once”. In my humble opinion, this is not a good strategy to use for trading in the long run, and if it helps to give you a better idea of how successful this strategy is, it’s also known as “Lotto Tickets”.

My conversations and further research have led me to believe that we are witnessing some of the most interesting events in the stock market in history, at least as far as I can remember.

There’s no simple answer as to why Gamestop (NYSE: GME) became the subject of the most high-profile short squeeze anyone can remember in the past few decades. However, in this post, I will try to explain what happened. This event is one of those confluence-of-events type of scenario where everything’s set up just so, and the setup is so widely followed that it takes on a life of its own. But, we’re getting ahead of ourselves. It’s best to start at the beginning, which isn’t complicated at all.

Before that look at charts for the breakouts.

About two weeks ago, GME stock had more or less been a reflection of Gamestop along with other brick and mortar companies like Bed Bath & Beyond, and AMC. These businesses had been sucking balls for quite some time. This made some very obvious sense because all of these businesses are physical retailers of products that are generally sold over the internet. You could, of course, argue that AMC is a different story as it’s meant for the movie theater experience but bear with me.

Now, the pandemic situation has made brick and mortar businesses bio-hazardous, but even before pandemia, consumers were done with these stores, especially with GameStop which was best remembered for giving a trade-in value of only around only 3% on old games towards the purchase of new games.

This story made onto the mass media news outlets, with many articles talking about “A YouTube streamer that helped garner attention to the run-up in GameStop shares has turned out to be a 34-year-old financial advisor who formerly worked for Mass Mutual”. This YouTuber, aka, “Roaring Kitty”, aka Keith Patrick Gill, along with the now-Reddit king legend, “DeepF*ckingValue”, helped bring a “flood” of retail traders into GameStopReuters reported on Friday.

“DeepF*ckingValue” also shared photos of his portfolio while posting about GameStop on Reddit. A screenshot appeared to show he had $754,99 invested in the company. At the time of this post, , his position was worth nearly $48 million, according to his Reddit posts. After all this hype, now even Robinhood and other new brokers are blocking retail traders from buying the stock because of the frenzy and FOMO (Fear of Missing Out).

Now the interesting part of this post. How can a trader foresee this trade ?

Let’s start with some definitions for some of my newbie readers:

What is a Short Squeeze?

First, what is the “Short”

Traders betting that a stock will go down in price borrow stock and sell it into the market. If they’re right and the stock price does go down, they’re in a position to buy the shares they borrowed for cheaper than they sold the borrowed shares for, pay back the lender, and keep the difference. If they’re wrong, and the stock goes up, they may have to buy stock to cover the loan at a higher price and lose money.

Tip: Some people know that you can make money when stock goes down which is known as shorting the stock however the key for the trader is this: Borrowed shares , pay back the lender, and keep the difference. Yep, the stock market is always a zero sum game.

The Squeeze

When a stock has a lot of people is shorting it, and that stock starts to move up, some of the short sellers traders (AKA Bears) get nervous. They start buying the shorted stock to cover their position and to get out. The higher it goes, the more nervous they get, and the more they feel like they have to cover before it runs up some more. Shorts in a squeeze grab the offer, driving the price up and compounding the problem, and, if it’s a stock with a lot of visibility… well… buying gets buying.

This is a known strategy for traders. However, the part that even caught me by surprise was that GME was a whopping 144% short interest float. In layman’s words, Brokers over lent to short-sellers traders. That is insane by itself.

Now, all of this was the set up to the real question you are asking: “ How was the trader able to get this shocking 2,333.12% return in just a few days?”

Well, Once the trader can see the overextension of shorting, (in this case, the legend “DeepF*ckingValue”) they can play the trade nicely using options calls.

Options calls are derivatives that allow the trader to have access to 100 shares for 1 contract (awesome leverage right! 🚀). There are some variables that change the price of the option. In this case, the variable that is in play is “GAMMA”. Hence this is a Gamma Trade. This means that the urgency of short-sellers trying to get out of the trade to buy shares are pushing the demand for the stock, which, in turn, makes the price of the stock skyrocket when the option is close to expiration. A similar situation happened with BlockBuster, Bed Bath & Beyond, AMC, and others - although not to the same extreme as GameStop.

Conclusion

The takeaway here is that reddit /r/Wallstreetbets became the largest crowdfunded and distributed hedge fund comprised of 3M subs at the time of writing this blog post. This is investment activism, and it is powerful. Wall Street vs distributed crowdfunded YOLO retail investors/traders. Did hedge funders think gamers were going to let them short GameStop? 😃 They should have known better.

Peace

-Erick