[FabHK]

1. I was expecting to read about a gamma squeeze... (people buy far out-of-the-money calls on GME (low delta), option seller is short, buys a bit of GME to get flat, more people buy & price goes up, delta goes up, option seller needs to buy more stock to hedge, and you have your feedback loop going (until option is far in-the-money, delta is one, and option seller doesn't need to buy anymore).)

But that never came... it was just positive feedback in perception.

2. It's not "usually" crazier than you expect. Most everywhere, we have feedback loops that keep things stable. Demand rises, prices rise, people think, eh, too expensive, and demand and supply are in balance again. Airplane gets bumped nose-up a bit, angle of attack increases on the wing and the horizontal stabiliser creating upward forces, but everything (centre of gravity, tail volume, etc.) is carefully designed such that this results in a nose-down momentum until the plane is in equilibrium again. And I could go on.

That's why it is so unusual when things spin out of control (nuclear bomb, anyone?).

3. As for GME, I trust that the forces of the market will pull it back down where it belongs soon enough.

EDIT: closed parenthesis

[e79]

Re #3: I held off investing significant money into Bitcoin because I was convinced that the forces of the market would pull it back down to $10 where it belonged soon enough. I’ve been asking myself ever since why I felt so sure at the time.

As for GME, there’s fundamental analysis and financial experts telling us it is only a matter of time before the price free falls. But there’s a serious behavioral dissymmetry here. The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals. I’m not sure you’re wrong, but I’m personally a little bit less certain that the price will drop — at least soon — due to this reason alone. As this article points out, feedback loops can be extremely powerful. And I suspect they can play out over longer periods than we expect.

[FabHK]

Your investment thesis would then be that GME becomes a token of value independent of the underlying business, dividends, and so on. More of a collector's item.

Intriguing, and (lamentably) not entirely impossible. But, you know: bubbles do have the habit of bursting.

[aphextron]

> Your investment thesis would then be that GME becomes a token of value independent of the underlying business, dividends, and so on. More of a collector's item.

Yes, that's basically the point we've reached with the stock market as a whole right now. Nothing is tied to any kind of fundamentals. It's all about "we like the stock".

[FabHK]

> Yes, that's basically the point we've reached with the stock market as a whole right now.

Not really, though. GME and other meme stocks might be out of whack a lot, temporarily, and stocks generally might be overvalued somewhat (and, I’d say, harder to value because rates are so low, making the horizon longer), but I’m pretty sure that the mechanisms are still there that fundamentals will reassert themselves.

[stickfigure]

At the very least, GME can print as much stock as they want and sell it into the market. They'd be crazy not to.

[rk06]

wouldn't that drive the value of stock down and threaten the company itself?

I am financially illiterate, but I understand the reddit posts to mean that short squeeze is inevitable because GME is >100% shorted and issuing more shares would kill the short squeeze and drive the price down

[dreamcompiler]

As Matt Levine pointed out in his columns this week, GME would likely attract a huge amount of SEC scrutiny if they tried to take advantage of this obvious insanity. That doesn't mean they would ultimately be found guilty of anything, but it would be a huge distraction from, you know, adding shareholder value by selling video games.

[marvin]

> Nothing is tied to any kind of fundamentals. It's all about "we like the stock".

Now, if many peiple start believing that, it will cause an actual bubble. When interest rates are taken into consideration, the global stock market valuation in terms of average P/E rates is about where you’d expect it to be.

Which is higher than but a few times before, to be sure. But still in the realm of plausible fundamentals.

[T-A]

https://www.hussmanfunds.com/comment/mc210118/

[brightball]

It’s as if it is a cryptocurrency all its own at this point.

[anonisko]

Except that it can be arbitrarily inflated.

[sverhagen]

Asking in earnest: how's that not true for crypto, like what Musk did to Doge?

[anonisko]

Musk didn't inflate Doge. He tweeted about it and a bunch of get rich quick folks scrambled to buy, driving the price up like a penny stock.

A share of stock represents a tiny percentage share in a company's assets and profits. For simplicity, let's say a company has 100 shares, and you own 1 share or 1%. If they then issue 100 new shares and sell them on the market to raise cash, your ownership in the company has been diluted from 1% to 0.5%.

That's why company shares will never be safe as an arbitrary store of value like bitcoin is. No one can arbitrarily dilute your share of the bitcoin pie.

[girvo]

I think they mean more stock can be issued, rather than the value being driven up.

[uyt]

That's disturbingly intriguing indeed.

In theory, what is stopping any stock from being a cryptocurrency (minus the crypto part)? Can anything tradeable with a fixed supply become a currency? What other magic requirement is missing?

[brmgb]

> Can anything tradeable with a fixed supply become a currency?

Yes, very much so (including something with unpredictable supply). Through history, diverse things were used as currency including shells, salt, silver and gold.

The commonly used definition of a currency was coined by Aristotle and is that it's an asset fulfilling three requirements:

- being an intermediary of exchange;

- being a store of value;

- being a unit of account.

You might notice that most cryptocurrencies are not actually currency owning to the first point.

[Jtsummers]

Ease of exchange. I can’t (easily) give you 100 GME to buy a new car. We’d need a particular arrangement which isn’t easy to come by in the current setup.

[bobthepanda]

If anything, cryptocurrencies are becoming more like illiquid equity rather than a currency. I can't exactly go to the store and exchange BTC for milk.

Interestingly, local dispensaries at one point entertained the idea of BTC ATMs to get around the fact that they have no ability to take credit cards due to the illegal state of pot at the federal level, but this was abandoned after a bit because the volatility was too expensive to make this a worthwhile proposition.

[rorykoehler]

What I do is use the virtual crypto wallet in Revolut. Keep money in BTC and when I want to buy something move the exact amount across to the FIAT currency account and tap to pay.

I keep a small float in FIAT so I only do this when it’s the cheaper option.

[quercusa]

Once the race for the exits begins, the price will drop the way it rose.

[throwaway-571]

Aren't we in a bubble since march 2020, if not sometime in 2018?

[hahajk]

I guess you have to ask what gives stocks value in the first place... especially tech stocks that don’t issue dividends.

[grey-area]

Future earnings over the next few decades is the traditional definition of value (returned as dividends, or price increase, doesn’t matter which).

Periodically people lose sight of that and start talking about a new paradigm and new valuations (usually because using that metric means prices are insane), but it always returns to future earnings.

All indicators are we are near the top of a spectacular bubble in assets from bitcoin to spacs to tech stock prices the red signs are flashing. Who knows how or when it ends though.

[chii]

dividends are irrelevant when valuing a stock - it's the company's earnings (and margins etc), and the future expected earnings that matter.

[FabHK]

> dividends are irrelevant when valuing a stock

Aka the Modigliani–Miller theorem.

https://en.wikipedia.org/wiki/Dividend_policy#Modigliani%E2%...

[shanusmagnus]

Unless there are dividends, all the factors you mentioned are purely symbolic. The fact that this symbolic -> monetary imputation is now the dominant determinant of stock price was the parent's point.

[newacct583]

> The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals.

It is this week. But let's be honest: (1) wallstreetbets isn't a very large community compared with the whole market, or even the capitalization of GME or AMC and (2) these are investors engaged in a fun revolution.

This won't stay fun for months. These folks want to trade in those portfolios. And if this doesn't go up any farther (it's been flat at ~$300 since Thursday), how many of those will get bored and sell so they can trade whatever the next meme stock is? Not that many, sure. But enough to push the value down lower, to a threshold where more Robinhood traders decide to get out. And we have exactly the kind of feedback loop described in the linked article.

GME is going to fall because there's no reason for GME to stay high. Once the short squeeze is over and the lols play out, it's just another failing company.

(And I continue to believe that this is going to turn out to be a big astroturfed scam when this is all said and done and I'm betting a bunch of the early players will turn out to have been executing a pump and dump.)

[dreamcompiler]

Bitcoin is not a stock and has no fundamentals; GME does. There's no objective value metric for Bitcoin so it can float freely. But because GME is at least loosely tethered to the value of a real company, I'm confident that will bring the price back to reality.

[thaumasiotes]

I don't follow the logic. Bitcoin has no fundamentals, so it can go as high or low as it wants.

GameStop has fundamentals. But you're free to ignore them; they're not hurting anything. GameStop has everything Bitcoin has, plus some extra things; it is therefore worth even more than Bitcoin is.

Said another way, it is nonsensical to claim that Bitcoin has no fundamentals. If you believe that (1) Bitcoin has "no fundamentals"; and (2) GameStop has fundamentals tethering it to a market capitalization of a few million dollars, what you're actually saying is that Bitcoin has fundamentals tethering it to a market capitalization of zero dollars.

[T-A]

> GameStop has everything Bitcoin has, plus some extra things

Including the ability to keep making losses in perpetuity, which would make it worth negative infinity.

[thaumasiotes]

No, it wouldn't. As a stock owner, fiscal losses by the company named on the certificate don't impact you at all.

[T-A]

The only way a business can keep running at a loss year after year and not be declared bankrupt is by raising more capital, i.e. by getting more money from its investors. The price of your existing shares will not fall below zero, but you (or somebody else) will be paying up for new ones.

[anonisko]

One caveat is that the insane valuation could let the company raise enormous amounts of cash and attract talent. Perhaps enough to revitalize the company into something with a legit growth story.

I'd say this is very unlikely, but it's not beyond the realm of possibility that GME becomes like a TSLA or AMZN that is constantly trying to catch up to the absurdly high expectations of investors.

[AmericanChopper]

GME stock will undoubtedly be carried for some period of time after the squeeze is over (is it already over? I don’t know...) by momentum and hype. But the inevitable outcome is that it crashes, because GameStop fundamentals are simply bad.

Bitcoin is a completely different proposition however, because so much of the demand is driven by black market commerce, and other equally inscrutable factors. Both the supply of and demand for Bitcoin are completely volatile. There’s basically no hope of performing a reasonable analysis of where it’s value might be heading.

[nostrademons]

Bitcoin did end up dropping about 80% from its late-2017 high. It took about 10 months, but it bottomed out in the 3000s, down from $17K in Dec 2017.

Wouldn't surprise me if GME does the same thing - just the sheer number of shorts will blunt the price declines a bit, as they cover.

[Judgmentality]

Yah, but dropping 80% when you've inexplicably climbed 10,000,000% (depending on the timeline) sorta shows that you're anchoring the reality to something that is already incredibly, ridiculously distorted.

[cccc4all]

The GME situation is huge mess created by billionaire vulture short sellers shorting more than 100% of stocks. Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price. All you have to do is simply buy and hold the stock, and the price will go up.

Traditional buy/sell signals are irrelevant, because of the short seller shenanigans. The short sellers created this perfect trap for themselves, now they are scrambling to get out of using every dirty tricks. The more WSB crowd is aware of this scenario, the more they jump in to the diamond hands philosophy.

[FabHK]

> Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price.

Yeah, but as I've explained elsewhere: Suppose long interest is 240% and short interest 140% (leaving net supply of 100% shares). Then, even if redditor HODLers hold 99% of actual shares, and won't sell them, it's enough if there is 1% free float, and the 141% remaining longs (who have lent out their shares to the shorts) are happy to sell at the current inflated price. The shorts can then close out their position with 140 of those 141 longs, and then you're left with 99% shares held by redditors, and 1% held by someone else who might want to sell at this point.

To squeeze the shorts, you need to control 100% or more of the long interest. I doubt that's the case here.

[cccc4all]

This post can explain why you only need smaller percentage to squeeze short sellers.

https://wallstreetplayboys.com/amc-gamestop-and-nokia-why-it...

The bottom line, everyone knows they can sell to short sellers at ANY price, because the short sellers have to buy at ANY price. Why would anyone sell to short sellers at less than ANY price?

[chii]

> because the short sellers have to buy at ANY price.

no they don't. They can bankrupt, and default on their contractual obligations. And if they are smart, what they will do today is setup a structure that protects their existing assets from seizure, and then short GME, and then default if it doesn't turn out well (or gain massive profit if it does fall).

[cccc4all]

That's the funny thing, that's not what's happening. It would make sense for those companies to declare bankruptcy in these scenarios. Instead, these short seller companies are being propped up by even bigger companies and the entire financial press is pushing FUD propaganda to convince normal people to sell.

This has never happened before. Why is this happening the way it has for past week?

[onedognight]

From what I read on WSB (caveat emptor), the broker (JP Morgan) is on the hook if the shorts go bankrupt. JPM needs to prepare for that possibility.

[javitury]

Price is a function of supply and demand. Shorting 140% of the stock increases supply by 140% and demand by 140%. It looks balanced, but there is an asymmetry in terms of pressure to close positions.

Those shorting shares have to pay interest, place collateral if price goes up and need to buy back those shares regardless of market price. The ones holding shares don't have that pressure and their losses are bounded.

If options are used, the effect depends on how the price of the underlying moves. Generally they just have a multiplicative effect, the losing side has to increase collateral.

A particularity of shorted calls is that losses are unbounded.

[devoutsalsa]

If the short position’s larger than the float, the squeeze will get sqouze.

[FabHK]

No. As I’ve explained, the crucial cutoff point is that the squeezers have to hold more than 100% of the long interest to squeeze the shorts. Whether the short positions add to 90% or 110% of the net supply matters only a bit.

[xapata]

Using the airplane analogy, there's a good amount of turbulence in the market. Especially as you look at smaller scales, both in time and price changes. There's a decent amount of literature discussing evidence that low-latency trading has increased market turbulence for little efficiency gain.

I'm having trouble scrounging up links, but a lot of good research came out of the Santa Fe Institute and associated folks.

[FabHK]

Absolutely... I think HFT is useless rent seeking. It provides little efficiency, I think, and the liquidity often drops out when the market needs it most, anyway.

[throwaway-571]

For exemple Robinhood mostly getting out of the GME trading business because it was too hot and they ran out of credit with their clearing house, preventing their users from participating in the market.

[ineedasername]

EDIT: closed parenthesis

Well, it still failed to compile because you didn't have a trailing ";" and the rest of your comment wasn't even in programming code.

[cccc4all]

Time in the market is more important than timing the market, is a common investment advice.

Current GME situation is not investing, it's short term speculation and gambling and ideological tussle and class fragmentation thrown in. All investing strategies and tactics are thrown out the window.

The billionaire vulture short sellers got careless and lazy by shorting 140% of stock. Then, they got caught with their pants down with naked shorts and now squealing to everyone to bail them out. They could have just ate the losses, but they decided to pull all the dirty tricks and shenanigans. It may or may not work.

The WSB crowd battling the billionaire vulture short sellers are out for more than gains.

[gruez]

>but they decided to pull all the dirty tricks and shenanigans

like what?

>The WSB crowd battling the billionaire vulture short sellers are out for more than gains.

I'm personally skeptical of this. It's easy to say you're doing this with noble reasons on the way up, but it's hard to tell whether the people are serious, or they they're trying to ensure there's enough bagholders to sell into.

[throwaway-571]

The WSB crowd complaining about the "ladder attack" (short selling the stocks between themselves at lower and lower prices to drive down the price), misinformation on CNBC, being prevented from being able to buy the stock on various broker (thus prevented from driving the price up and causing the gamma squeeze to cause the short squeeze) "it was supposed to be a free market and we can't trade as freely as the billionaires" which, fair complaint I guess.

[SwaggyG]

Is it illegal

[corneeeeelius]

It's only illegal if you're poor enough

[fullyellow]

nonsense

[cccc4all]

The Robinhood shenanigans that stopped people from buying GME and allowed selling GME. Melvin Capital claiming they got out of short positions, without any significant changes in short %. The entire financial media propaganda telling people to sell GME. etc.

I didn't say WSB crowd was acting with noble reasons, but they are acting with more than financial interests. If you've read recent WSB posts, lot of the emotional appeal is ideological and class fragmentation, than lolz gainz. And, very few people actually posts in forums, so you have to multiply the sentiment by thousands, if not millions.

The bottom line is the price of GME, it's still above $300. Which everyone knows and agrees is over valued. Why, especially after the turbulent week?

[gruez]

>Melvin Capital claiming they got out of short positions, without any significant changes in short %.

That's not too strange. It's entirely possible for them to close their short position by doing a private sale to another hedge fund. I don't imagine it's too hard to find takers given how inflated GME is.

[throwaway-571]

Don't they have to buy stock to exit the position? How do you sell a "short position" that is hemorrhaging money?

(genuinely curious, I'm learning about this to distract myself from covid-19)

[gruez]

You can offload it to someone else. Say you shorted 100 shares at $50, but the price later goes to $100. One way to exit the short is to buy 100 shares on the open market, taking a loss of $5000. You can also find someone who wants to short, pay them $10,000, and transfer the position to them. Now the short position is off your hands, and the other person effectively entered into a short position at $100. It's kind of like taking over a lease.

[throwaway-571]

I am wondering the same.

Maybe everybody is kinda hoping for the short squeeze? WSB is to stick it to the man but the other market participants?

The stock is shorted above 100%. If the price goes up enough, maybe the shorters will be have to exit their position and then will be the one left bagholding?

It really depends at which price they started the short. $8, $20 $350 $450?

But the puzzle is that "retail" is only a third of the market. a lot of the after hour kept it above 300 on Thursday and on Friday, and that is not the John Q Public doing those trades, so the big fish seem to be in agreement that it might be worth a try to go for the squeeze?

[paulpauper]

It would seem almost all the GME buying is in the afterhours and premarket, causing these huge 100% gaps. This suggests an effort to squeeze call sellers, as options cannot be traded afterhours and rpemarket. This means call sellers need to buy stock to neutralize the delta.

[sillysaurusx]

Anyone want to ELI5 gamma squeeze? Isn’t that just a description of what happened with GameStop? But then I thought that was a short squeeze.

[joncrane]

Gamma squeeze has to do with options, short squeeze has to do with just stock.

Therefore the gamma squeeze has a timing component, while short squeeze can happen at any time irrespective of when options expire.

[FabHK]

Let's give it a shot.

Squeezing shorts is trying to make sure that the shorts (that need to buy back shares) don't find any shares to buy, thus driving up the price (as they'll offer more and more to buy the shares they're obliged to return to those they borrowed them from).

With a gamma squeeze, you also aim to drive up the price, but the mechanism is a different.

As you might know, the payoff of a call option (as a function of the stock price S at expiry) looks something like this:

  __/

With S below the strike K, it's worth nothing, and as S exceeds the strike, the payoff goes up.

The price of a call option before expiry looks basically similar, but smoothed out.

The delta of an option is the first derivative of that graph, or, to put it differently, the change in the price of the option as S goes up. You can convince yourself that when S is very low, the delta of the option is very close to zero, and as S approaches K, the delta increases, and with S much higher than K, delta is basically 1.

(Take an option struck at 50. When S = 10, it's worth basically nothing, and when S = 11, it's still worth basically nothing. So, delta = 0. When S = 200, option is worth about 150, when S = 201, it's worth about 151. So, delta = 1.)

[Gamma is the second derivative. It's basically zero when the stock price is very low or very high, as delta doesn't change. But near K, gamma rises - delta changes!]

Now, if an option trader sells you a call, you're long (you win if the stock goes up), trader is short. Trader doesn't like that risk, so they'll buy the stock to cancel out their price risk. How much stock? Well, depends on delta. If S is small, and delta, say, 0.1, they only need to buy 0.1 stock. Then, for small movements of S (say, a small increase), what they lose on the option, they gain on the stock.

However! If the stock moves substantially, particularly if S approaches K, the delta of the option goes up (gamma is not zero anymore). So, the trader needs to buy more shares to be flat again.

So, here's the strategy: Cheaply buy way-out-of-the-money call options (S << K). Then, manage (somehow), to drive the share price S up towards K. The trader who sold you the options will then buy S, potentially driving up S even further. That's the gamma squeeze.

[Note: The trader that sold you the call charged you a fixed premium at the beginning. Now they must buy the stock when it has gone up, and sell it when it has gone down. So, as the share price goes up and down, they lose money (since they buy expensive and sell cheap). If the share price goes up and down a lot, they'll lose more than they got on the premium. If the share price goes up and down only a bit, say when it moves smoothly in one direction only, or not at all much, then they'll lose less than they got on the premium, so they'll win.

That's why we say that someone that wrote a call is short realised vol: if realised vol is high (higher than the implied one that he charged you for the option), they'll lose, and vv.]

When you wrote an option, you're short vol, short gamma, and long theta. When you bought an option, you're long vol, long gamma, short theta.

[throwaway-571]

The gamma squeeze also works going down, if they had to load shares on the way up they have to unload on the way down, accentuating a down trend.

When you drive the price of the stock up you increase the interests the short have to pay on the shares they borrowed to sell, or maybe increase the capital requirements they need to maintain this position on their books, reducing their upside.

If the interests or the capital requirements for maintaining the position get too high, or the owners of the shares want them back, they might have to exit their position, "no matter the cost" hence the "squeeze" part.

(I'm writing it down to see if I understood it all correctly)

[FabHK]

You’re right, the option gamma squeeze works on the way down (past the strike) as well in accelerating the movement.

It is as if the option seller (who is short gamma) follows a momentum strategy - when price goes up, they buy, when price goes down, they sell.

As for the short squeeze - why would the owner of the shares want them back from the shorters? Well, presumably to sell them.

The conversation would go like this: BlackRock to Melvin: give me my shares back! Melvin: why? B: the Price has gone up to 300! It’s insane! We are a traditional fundamental investor and bought them at at 15. We want to sell them and lock in our profit! M: ok, how about I buy the whole bunch of you, and we call it even? B: done.

All the redditors that hold on to their shares for dear life: what just happened?

[vegesm]

I wonder how much of those shares can BlackRock/etc actually sell. BlackRock has many index funds GME part of so they must hold on to those shares

[sillysaurusx]

Fabulous. I really appreciate the in-depth writeup. I couldn’t have hoped for more!