Jan 28th, 2023: The Flaw in the Market: Will There be Another GameStop-like Event? I just finished watching the Netflix series “Eat the Rich: The GameStop Saga”. This series portrayed the story of how a group of millennial misfits banded together online to rescue their beloved GameStop from the clutches of Wall Street hedge funds. The series explained the inner-workings of what triggered the meme craze, but missed that there were other hedge funds and traders from different age groups who also jumped in late on the short squeeze on platforms such as Interactive Brokers, Schwab, TD, and Fidelity. GameStop was the most actively traded stock on all these platforms. The losses for those who missed the first week of the craze were staggering, and despite congressional hearings, the government has not yet fixed the underlying flaw in financial markets.
The Wall Street Journal recently noted that Tesla has become one of the hottest stock-option trades on Wall Street. Tesla options trading accounts for roughly 7% of all options trading on an average day, and nearly three million contracts change hands on an average day according to Cboe Global Markets data. This is up from 1.5 million a year ago and more than any other stock, with the exception of wagers on the SPDR S&P 500 ETF. The WSJ wrote that many of the biggest options bets on Tesla are lottery-ticket trades requiring statistically improbable moves to pay out. For instance, the most popular bet is for Tesla shares to double within 12 months from their previous record high of $409.97. That would require a more than fivefold surge from Thursday’s close of $160.27.
I believe this article was the spark that caused Tesla to jump 10% on Friday. The volume almost doubled, and the number of options traded was insane. It led to a massive short covering rally in all the most heavily shorted stocks. Even GameStop was up 15% at one point, and there were a dozen or so stocks up over 10%. The ETF that captures all the mostly widely shorted stocks, the ARKK ETF, was up over 5% for the day. The rally this year is in the companies that were down the most in 2022. The ARKK ETF finished down -66% last year, and the bear market math that I wrote in prior posts is at play. A $100k investment at the start of 2022 would have finished the year at $34k, and after a massive 29% rally this year, the investment would only be $44k. The flaw in this market is that weekly options are now traded like fantasy football DraftKings lineups. The last hour on Friday is usually the time when markets will see the biggest moves when all the contracts are closed out, and profits are taken. It’s impossible to know when this short squeeze will end. The GameStop short squeeze only ended when all the brokerage firms illegally banned together and wouldn’t allow investors to buy.
The weekly options are now more popular than trading stocks. The statistics prove that 90% of people lose money trading options, but the short-term gains can be enormous. In one of the worst years on record last year, Citadel was the most successful hedge fund ever after it made $16 billion, the biggest annual windfall on record. They are the market makers for all the day traders, and they will ultimately be the biggest winners making money off all the retail traders. Since the flaw in the market was never fixed, there is a good chance that GameStock or another heavily shorted stock breaks the back of the shorts. The short sellers betting against the market last year were not expecting the worst stocks that were left for dead with the largest losses to jump over 50% in price to start the year.
High-frequency computers that fix prices seem to be programmed differently than last year. For example, Microsoft reported and missed both earnings and revenue, but the stock went up 8%. Then, they issued a dire forecast and the stock fell, but recovered all the losses and finished up 8%. Intel issued one of the worst reports in recent memory for a large growth company, yet the stock only fell 6%. Last year, the stock would have dropped 30% on such an awful report. This type of activity is putting a scare in the shorts because there are many companies issuing warnings, but the stocks keep climbing.
The one-day moves in the market will be even more magnified because the volume of options has to move prices to the extremes in both directions. For example, Chevron announced a $75 billion stock buyback, and the stock jumped almost 5%. Option traders thought the easy money would be buying one-day calls or writing put contracts because there was no way the stock could fall after this type of announcement. However, the stock dropped $9 or 5% from the high the next day when it was least expected.
The possible recession and higher interest rates were supposed to put an end to all of the speculation in the markets, but I don’t believe that higher interest rates are having a significant impact on tech stocks. If the Fed believes higher rates will stop investor speculation, they are wrong. Stocks rallied during the lockdown and recession, so it’s not surprising that there could be another massive rally at the start of another recession. Day traders are not concerned about whether rates are 3, 4, or 5 percent, as they are trying to make over 20% in a single week. They are trading weekly options and really don’t care about Fed policy. The cycle has been that as soon as earnings season ends, all the headlines turn back to politics and the Fed. It seems the only thing that the Fed is doing is costing some people their jobs and putting a financial burden on low-income borrowers while enriching the bankers. In my opinion, the inflation was caused by the Fed and the free government handouts and it will take a few years for the trillions of dollars printed to work through the system. Hopefully, this short squeeze continues and crushes all the short-sellers that unrelentingly pushed stocks down week after week last year. The only downside is that I expect those who catch the end of this rally will have a bad hangover. It’s only been a few weeks and I’m sure the shorts will not be sleeping well this weekend.
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I just finished watching the Netflix series “Eat the Rich: The GameStop Saga”. This series portrayed the story of how a group of millennial misfits banded together online to rescue their beloved GameStop from the clutches of Wall Street hedge funds. The series explained the inner-workings of what triggered the meme craze, but missed that there were other hedge funds and traders from different age groups who also jumped in late on the short squeeze on platforms such as Interactive Brokers, Schwab, TD, and Fidelity. GameStop was the most actively traded stock on all these platforms. The losses for those who missed the first week of the craze were staggering, and despite congressional hearings, the government has not yet fixed the underlying flaw in financial markets.
The Wall Street Journal recently noted that Tesla has become one of the hottest stock-option trades on Wall Street. Tesla options trading accounts for roughly 7% of all options trading on an average day, and nearly three million contracts change hands on an average day according to Cboe Global Markets data. This is up from 1.5 million a year ago and more than any other stock, with the exception of wagers on the SPDR S&P 500 ETF. The WSJ wrote that many of the biggest options bets on Tesla are lottery-ticket trades requiring statistically improbable moves to pay out. For instance, the most popular bet is for Tesla shares to double within 12 months from their previous record high of $409.97. That would require a more than fivefold surge from Thursday’s close of $160.27.
I believe this article was the spark that caused Tesla to jump 10% on Friday. The volume almost doubled, and the number of options traded was insane. It led to a massive short covering rally in all the most heavily shorted stocks. Even GameStop was up 15% at one point, and there were a dozen or so stocks up over 10%. The ETF that captures all the mostly widely shorted stocks, the ARKK ETF, was up over 5% for the day. The rally this year is in the companies that were down the most in 2022. The ARKK ETF finished down -66% last year, and the bear market math that I wrote in prior posts is at play. A $100k investment at the start of 2022 would have finished the year at $34k, and after a massive 29% rally this year, the investment would only be $44k. The flaw in this market is that weekly options are now traded like fantasy football DraftKings lineups. The last hour on Friday is usually the time when markets will see the biggest moves when all the contracts are closed out, and profits are taken. It’s impossible to know when this short squeeze will end. The GameStop short squeeze only ended when all the brokerage firms illegally banned together and wouldn’t allow investors to buy.
The weekly options are now more popular than trading stocks. The statistics prove that 90% of people lose money trading options, but the short-term gains can be enormous. In one of the worst years on record last year, Citadel was the most successful hedge fund ever after it made $16 billion, the biggest annual windfall on record. They are the market makers for all the day traders, and they will ultimately be the biggest winners making money off all the retail traders. Since the flaw in the market was never fixed, there is a good chance that GameStock or another heavily shorted stock breaks the back of the shorts. The short sellers betting against the market last year were not expecting the worst stocks that were left for dead with the largest losses to jump over 50% in price to start the year.
High-frequency computers that fix prices seem to be programmed differently than last year. For example, Microsoft reported and missed both earnings and revenue, but the stock went up 8%. Then, they issued a dire forecast and the stock fell, but recovered all the losses and finished up 8%. Intel issued one of the worst reports in recent memory for a large growth company, yet the stock only fell 6%. Last year, the stock would have dropped 30% on such an awful report. This type of activity is putting a scare in the shorts because there are many companies issuing warnings, but the stocks keep climbing.
The one-day moves in the market will be even more magnified because the volume of options has to move prices to the extremes in both directions. For example, Chevron announced a $75 billion stock buyback, and the stock jumped almost 5%. Option traders thought the easy money would be buying one-day calls or writing put contracts because there was no way the stock could fall after this type of announcement. However, the stock dropped $9 or 5% from the high the next day when it was least expected.
The possible recession and higher interest rates were supposed to put an end to all of the speculation in the markets, but I don’t believe that higher interest rates are having a significant impact on tech stocks. If the Fed believes higher rates will stop investor speculation, they are wrong. Stocks rallied during the lockdown and recession, so it’s not surprising that there could be another massive rally at the start of another recession. Day traders are not concerned about whether rates are 3, 4, or 5 percent, as they are trying to make over 20% in a single week. They are trading weekly options and really don’t care about Fed policy. The cycle has been that as soon as earnings season ends, all the headlines turn back to politics and the Fed. It seems the only thing that the Fed is doing is costing some people their jobs and putting a financial burden on low-income borrowers while enriching the bankers. In my opinion, the inflation was caused by the Fed and the free government handouts and it will take a few years for the trillions of dollars printed to work through the system. Hopefully, this short squeeze continues and crushes all the short-sellers that unrelentingly pushed stocks down week after week last year. The only downside is that I expect those who catch the end of this rally will have a bad hangover. It’s only been a few weeks and I’m sure the shorts will not be sleeping well this weekend.