Doc's Daily Commentary

Mind Of Mav

Weaponized Retail Trading: David vs. Goliath

No one person has a monopoly on knowledge. The same applies to groups. In the age of the internet, information and knowledge have been decentralized.

The GME short squeeze has been wrongly framed by mainstream media. It has been narrated as if some group of clueless Robinhood kids on the Reddit thread r/wallstreetbets have piled into the GME stock without thought.

The narrative is misguided and wrong. It is misinformation that needs to be debunked.

Original Sin — Overcrowding in one Trade by Smart Money

Stupid Money clearly saw a shorting mistake by smart money. That mistake is overcrowding in one trade. Smart money short-sellers had taken huge short positions on GameStop (GME). The short positions alone amounted to more than 130% of the issued shares of GME.

Mathematically, it was bound to end in tears. A squeeze was inevitable. It was a colossal mistake by hedge funds. It is a lesson on position sizing. Positions taken should also be viewed from an overall market perspective instead of being viewed solely from a fund perspective.

The piling up in short positions by smart money was due to a very high conviction rate that GameStop was not going to survive the wave of consumer changes currently underway, with gamers buying gaming stuff online. The shorting decision makes sense. It’s the size of the shorts that did not make sense.

It’s not the Robinhooders Driving the price up, It’s the short-sellers

A common wrong belief is that r/wallstreetbets users keep buying the shares so that the price keeps going up. This is wrong. The Reddit groupies do not have to continually buy shares to support the high prices. All they had to do was buy enough shares to initiate price increases. The initial increase needed is just enough to trigger the margin calls on the short-sellers.

A short seller borrows shares and sells them, waiting for the price to go down so that he can buy them at a lower price. If the price goes up, he makes a loss. Since the position is marked-to-the-market, margin calls trickle-in as the price goes up. As time passes, the borrowed shares will be due and the short seller has to buy them in the open market at a higher price to close his position. This drives the price up.

Another dynamic is at play. The Robinhood Fintokers had bought call options on the stock. The writers of these call options have to hedge their exposures. The call option is essentially giving the holder the right to buy the stock at a predetermined price. If the price is rising, the writer of the call makes a loss. Prudent risk management for banks/brokers/hedge funds means they have to cover some of the call options they sold. That’s where gamma comes into play. They have to buy the actual shares. This activity drives up the price of the shares.

Thus we have two groups outbidding each other in driving the prices up. We have the short sellers and the call option writers. They are squeezed. They are forced by the laws of mathematics to pump the prices higher and higher, against their conviction.

It is a deadly feedback loop. Short-selling is an inherently deadly trade because there is a limited upside (profit) and an unlimited downside. Wall Street was playing with fire and the shadow wall street (Reddit users) found them out.

To recap this section:

– The Robinhood kids on Reddit only had to initiate a price rise and wait for the fun.

– The short-sellers are forced to either hedge or exit their positions at every price rise. Because they were too crowded in the trade, the buys for hedging purposes are enough to drive prices up. Let them hang themselves with their own rope.

– This is the classic short squeeze, but because the GME one involved buying many call options, it is known as a Gamma Squeeze.

The power of retail investors lies in their numbers and it seems with these attacks on short-sellers, they have found a way to make their voice count without violating the laws.

This is a Battle

– Retail Investors versus Institutional Investors.

– “Stupid Money” versus Smart Money.

– David versus Goliath.

Without a doubt, many people will be rooting for the small guy. The idea of a battle is in the big picture. It is highly likely to be a continuing trend. By leveraging on the power in numbers, the little guys are unknowingly weaponizing day trading, to the detriment of the big guys who have enjoyed endless benefits via bailouts (a.k.a socialization of losses for Big Fin)

Not Amateurs Anymore

The GME move executed by Reddit users calls upon us to review our branding of retail investors as amateurs. Amateurs do not pull such a well-calculated and well-executed move.

The GameStop gamma squeeze is a show of force.

Popcorn, check! Soft drink, check! VR glasses, Check!

Let the games begin.

It’s going to be a year of fun.


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