> do people still think Efficient Market Hypothesis is a thing?
Sure, it's a thing. But underdamping is also a thing. And information diffusion is also a thing.
The efficient market hypothesis doesn't say "markets are always efficient, and prices only move based on new public information." Rather, that information diffuses into the market. Some idiot hotshot billionaire short-seller overshorted GME, and it took time for that information to spread to other market participants. Then, once the information was there, it took time for the upward price impact to un-do the impact of the short. And it is going to overshoot the true asset value because the market is underdamped -- contrarians aren't going to step in immediately, and longs are still waiting to put in a clear indication of a top.
The real joke here is that Plotkin went so heavily short a name that was trading at a mere fraction of its annual sales.
Personally I think there are two SEC rules that should come out of all of this:
First, shorts should be reported alongside longs in 13F filings.
Second, there should either be a limitation on re-hypothecation for heavily shorted names, or short sellers should not be able to add to new positions once shorts go beyond 100% of the float.
A November 2021 "put" at the present market price of ~$360, the right to sell GameStop stock in November at $360, is selling for about $300.
For comparison, a January 2022 put at Microsoft's present market price of ~$235 is selling for ~$30.
GameStop is presently a cafeteria food-fight. It will end, a lot of people will be sad, everyone will remember the story, and GameStop stock will eventually better-correlate with business performance.
Edit: Indeed, the fact that one can buy puts for so cheap is interesting, as GameStop is probably "worth" $30 or less at present. However, is it worth risking $300 to perhaps make $30 while food is flying around? Not for me.
You should probably put the bottom, italicized part closer to the top of what is a good illustration. Many folks (most?) won't immediately know what a $300 premium means to a $360 strike price. Meaning even if it goes to zero, you make a whopping $60. But your point of making $30 on a $300 risk clears it up, I think.
You don’t actually understand option prices. Put-call parity. The reason why options are so expensive is because of high implied volatility. Both calls AND puts are expensive; as they always will be, because if they’re not balanced, a risk free arbitrage ensures.
No, they are only the same price under very strict assumptions. The put-call parity says that buying a call and selling a put creates the same payoff structure as being long the stock itself. Depending on the strike, the put or the call could be ~100% of the value of the position. Only when you get near the price of the underlying do the put and call equal each other.
I think I do understand them, from a value-investor's perspective. If I buy an option, I actually intend to exercise it or hold it until expiration, not hedge with it.
If I bought a GameStop put today, for the pricing in my post above, it would be because I was willing to make a strong bet that GameStop's intrinsic value in November would remain below $60/share and that I was fairly sure the market would return to its senses by then. How the option-seller reaches her offering price is entirely irrelevant to me.
It is true that much of the pricing of options comes from volatility, but for me, as a buyer, it is perhaps irrelevant.
Thanks for your perspective, though. I'll read your link with interest.
What I mean is you cannot make directional predictions of a stock from option prices. The information just isn’t there. The same way you can’t use long dated futures. Because S&P 500 futures (during regular trading hours) will always be the current price, modified by the financing cost. There can never be a directional prediction, because all directional predictions get arbitraged away into the current price.
I've had more time to think about this now -- it would appear that directional prediction can be arbitraged away in a world where the future cannot be known. In general, however, through research, one can begin to divine a glimmer (or more) of the future direction of the underlying.
In that situation, someone with a reasonable guess at the future could absolutely murder uninformed arbitrageurs, right? It is my expectation that "correct" pricing of the options should fold in information about both the expected volatility and the direction of the underlying.
I think you're just seeing volatility difference between the stocks, not sentiment difference. Calls on Gamestop are also more expensive than Microsoft right?
I guess it is not the efficient market in the sense of valued according to the underlying financials. But to me at least it is "efficient" in the sense that the price is now basically tied to supply and demand. You have a stock that has >100% of outstanding shares short and a ton of people buying and holding the stock intentionally to prevent those users from covering the shorts. If nobody wants to sell you a share at 100$ you have to offer more and the more you offer the more in the hole other shorts become. This is the market punishing people who thought they were getting easy money by shorting the hell out of a dying company.
This is a reductive take, there is the idealized model of the market that the efficient market hypothesis refers to and there is the real one, which can get quite messy.
The market does serve a real purpose, ie deploying capital and providing liquidity.
It serves that purpose, but is the market as it exists today the best way for society to achieve that purpose?
K-shaped recoveries make me think "I wish there were a better way."
But I'm an idiot. So my best idea right now is, "When a business issues stock, they also have to issue an additional 20% to the government, and then we need to keep the tax rate low-ish on dividends, but increase the tax rate on capital gains - hopefully encouraging companies to pay dividends, which the government would receive."
I'd appreciate if someone could tell me why my plan is awful. Because I'm sure it is, but I haven't been able to figure out why it's awful.
You're proposing to make the market more efficient by giving the politicians more power to boss companies around and pick winners and losers. This is an excellent thesis if you believe central planning is the best way to allocate society's resources and is definitely never a vehicle for official corruption, and taxpayer funds are never ever misused for bailouts and other political favors. If not, such a move will only exacerbate the common complaints of today.
As it turns out, government is already entitled to N% of a company's profit, through corporate taxes. If you are greedy on behalf of the politicians and want N to be a bigger cut of that, that's one thing.
But if politicians want to boss companies around, they already have the option to go on record and pass neutral and generally-applicable laws to do that — and such laws are a fair sight better than the shady backroom deals that will go in when politicians start filling board seats with political apparatchiks. Do you want Donald Trump filling a board seat at Disney with someone like Jared Kushner? If you do, do you want Biden appointing his son Hunter to a board seat at Tesla? Can you imagine the insane conflicts of interest multiplied by the entire economy? It's bad enough already. We really, really don't need to glue together everything shady about big business with everything shadowy about government.
P.S. Oh, and the other thing is that people start raising capital and incorporating in ways that these confiscatory taxes and seizures of control that you propose just don't apply. More private equity, or just incorporating overseas.
P.P.S. Oh, it also favors the companies who don't need to raise capital on the markets: Apple can just take its cash hoarde and invest like crazy, while the next hot Silicon Valley player that would challenge them has to pay 20%.
> You're proposing to make the market more efficient by giving the politicians more power to boss companies around and pick winners and losers.
I'd love to hear your analysis of how Norway is handling their oil reserves.
Huge companies are not paying taxes. That's a problem. You seem to think there's no good solution. I maybe agree. But I'm willing to move on to a bad solution. How about you?
> As it turns out, government is already entitled to N% of a company's profit, through corporate taxes.
If you think in practice that actually works, then you and I are on completely different pages.
> politicians start filling board seats with political apparatchiks
I'm proposing the government receive non-voting shares, or is just restricted from voting. I don't want politicians on boards.
In fact, if you're curious, I think that the major political parties should refuse to endorse anyone who doesn't 100% divest themselves of all future income, instead promising to receive all of their future income through their government pension. And elections should be publicly funded (each citizen gets $100 per year to allocate to whichever politician or party they want to, and that's it). Amend the Constitution to overturn Citizens United. Re-instate the Fairness Doctrine.
> everything shady about big business with everything shadowy about government
That you apparently believe they're not already 100% glued together already shows again that you and I are on completely different pages.
> More private equity, or just incorporating overseas.
Yes, we need a "Uniform Commercial Code" for taxation, around the world. We all suffer that that doesn't exist.
> Apple can just take its cash hoarde and invest like crazy
That problem already exists in many ways. We should never have allowed corporations to get as big as they are, and we should start to break them up. Competition is good.
Yeah, you can't isolate one aspect of how our global economy works and talk about it in isolation.
And no, I didn't say "I want to deploy capital more efficiently."
I actually used the phrase "is [this] the BEST way" [emphasis added].
We went through a K-shaped recovery. Capital did AWESOME. I'm now asserting that the society should think about better ways to ALLOW capital to be deployed.
Well, not sure which country you're writing from but here in the US, private property laws should be enough to nip the idea of government taking shares of a private company.
Dividends and capital gains in general have an inverse relationship, ie dividend paying stocks typically are low growing and as such don't tend to experience much price increase (ie capital gains). You own such shares so you can get the consistent dividend (share of profits) as your return...There may be exceptions but in general this relationship holds.
In a non-bubble market, the capital gains are a reflection of company's growth and expected future profits, thus the stock price is based on present-value-of-future-cashflows model (ideally of course, the reality is often messy).
In other words dividends and capital gains are not inherently in conflict, they merely reflect life-cycles of companies. Of course there are a ton of unprofitable companies on the market currently with high stock prices, there is a larger debate to be had on why that is and how to curtail it.
In one dimension, the new GME management (which did occur) does a secondary market offering directly into liquidity, recapitalizing themselves which changes all the fundamentals. This wouldnt be known information because the expectation of no liquidity, but now that there is liquidity it creates new information
The only way this could get stupider is if GME took their impressive new warchest and bought/merged with Valve, pulling a unicorn into the stock market. At that point, reddit would have memed a brick and mortar retailer into a SPAC.
Sure, it's a thing. But underdamping is also a thing. And information diffusion is also a thing.
The efficient market hypothesis doesn't say "markets are always efficient, and prices only move based on new public information." Rather, that information diffuses into the market. Some idiot hotshot billionaire short-seller overshorted GME, and it took time for that information to spread to other market participants. Then, once the information was there, it took time for the upward price impact to un-do the impact of the short. And it is going to overshoot the true asset value because the market is underdamped -- contrarians aren't going to step in immediately, and longs are still waiting to put in a clear indication of a top.
The real joke here is that Plotkin went so heavily short a name that was trading at a mere fraction of its annual sales.
Personally I think there are two SEC rules that should come out of all of this:
First, shorts should be reported alongside longs in 13F filings.
Second, there should either be a limitation on re-hypothecation for heavily shorted names, or short sellers should not be able to add to new positions once shorts go beyond 100% of the float.