Author Topic: GME deathwatch - how to profit?  (Read 82858 times)

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #250 on: March 15, 2021, 08:39:30 AM »
I've been waiting for a mainstream news outlet to comment on GameStop, and I just saw a BBC News article.  It will take more than that, but suggests I might see more mainstream news coverage before Monday's open.  The more mainstream news coverage, the more likely Monday becomes a repeat of Feb 1 for GME shares.
Not much mainstream news coverage; not much of a move with GME stock so far today.

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3963
  • Age: 40
  • Location: Florida
Re: GME deathwatch - how to profit?
« Reply #251 on: March 16, 2021, 06:28:22 AM »
Well, it's not GME, but I finally placed a small short on AMC.

Insane how many shares they're issuing

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #252 on: March 16, 2021, 07:25:54 AM »
In pre-market trading, GME has dropped inside my put spread ($200-$100).

AMC does seem overpriced.  I think Disney's streaming service is a massive blow to movie theaters.  Disney movies are a huge chunk of movie theater revenue, but now those movies are on Disney's streaming service at the same time they show up in theaters.  Meanwhile AMC has restricted seating (25%?) in New York, and lots of debts to pay.

I thought I saw AMC at $18/sh in pre-market, but it's under $14/sh now.

theoverlook

  • Bristles
  • ***
  • Posts: 488
Re: GME deathwatch - how to profit?
« Reply #253 on: March 16, 2021, 07:39:50 AM »
It was pretty astonishing to see someone on Wall Street Bets YOLOing $570k into GME (he sold Tesla and bought GME) near the latest peak. $273/share and that's when he decides to get in. Well, I guess if you truly believe that it's on the way to $1000+...

chasesfish

  • Magnum Stache
  • ******
  • Posts: 3963
  • Age: 40
  • Location: Florida
Re: GME deathwatch - how to profit?
« Reply #254 on: March 16, 2021, 10:46:19 AM »
In pre-market trading, GME has dropped inside my put spread ($200-$100).

AMC does seem overpriced.  I think Disney's streaming service is a massive blow to movie theaters.  Disney movies are a huge chunk of movie theater revenue, but now those movies are on Disney's streaming service at the same time they show up in theaters.  Meanwhile AMC has restricted seating (25%?) in New York, and lots of debts to pay.

I thought I saw AMC at $18/sh in pre-market, but it's under $14/sh now.

AMC will probably be fine now, they've eliminated most of their debt through share offerings and the biggest liability is the lease liability to EPR, which is a pact of mutual destruction.

AMC has quadrupled it's share count.  It's not worth 50% more than it was in 2016 with all the headwinds on theatres.  The reason I liked the short at $14 is management will issue as many shares as they can between $10-$12, they'll probably do a convertible debt offering soon to eliminate the rest of their high cost debt.

Amazing redditors have rescued this company from bankruptcy for years through buying up the share offerings.

I used to loan to this industry then consulted with a competitor of AMC, I know it well.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #255 on: March 16, 2021, 11:08:10 AM »
According to Yahoo Finance, AMC's $4.35 billion market cap ($12.83/sh) includes $300 million in cash (under $1/sh).   Don't they have $11.4 billion (-33.63/sh) of debt?
https://finance.yahoo.com/quote/AMC/key-statistics?p=AMC

Agree with the dilution: last I checked, they went from 104M shares in April 2020 to 339M shares in Feb 2021.  I expect investors to get a big shock when they see revenue and earnings per share numbers.

---
The most optimistic GME calls (2023 strike $950) were going for $90/sh, and are now down under $45/sh.  Margin requirements dropped in half, too.  Maybe I'm just stuck with it for 2 years, until it expires... it would be nice to close the position before then.

I've now reached my new limit of 5 speculative positions on AMC/GME/similar:
2 AMC put spreads that profit as the stock drops from $9 to $4
1 AMC put at $12/sh
1 GME put spread profiting from $200 to $100
1 GME put spread I bought last week and didn't mention, from $130 to $45

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #256 on: March 25, 2021, 09:13:33 AM »
"GameStop Corp said on Tuesday it may sell new shares this year to take advantage of a more-than 800% run-up since January ..."
https://finance.yahoo.com/news/1-gamestop-revenue-shy-estimates-204336029.html

I actually heard about that possibility first from Jim Kramer, who this week said GameStop might issue new shares (he's been criticizing them for not doing so for a long time, too).  I meant to open put options and had procrastinated, so that motivated me to finally open a put spread ($150 - $50) on GME.  I figured it was either my last chance to get in early, or a way to take advantage of the possibility.  So far, so good.

For those holding long positions, how much share dilution do you expect?

GameStop currently has a $10 billion market cap, with 70 million total shares.  Two years ago they had 100 million shares, so my wild guess is they print 30 million shares.  So instead of being worth $145/sh, they'd be worth $102/sh as they increase the number of shares by +42%.  But that's a wild guess: they could also be satisfied with printing 10 million shares, in which case the stock drops to $127/sh from +14% share dilution.

If you're holding GME stock, know I'm biased as a short seller.  But GameStop hinting at printing new shares is a significant development.
« Last Edit: March 25, 2021, 10:46:30 AM by MustacheAndaHalf »

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4752
Re: GME deathwatch - how to profit?
« Reply #257 on: March 25, 2021, 10:36:51 AM »
Perhaps Gamestop will go the way Netflix went a decade ago, and invest in becoming content creators instead of just middlemen who handle physical discs. I could see them raising funds from stock dilution to buy out a game developer or to create their own in-house game brand.

This is NOT an endorsement to go long the stock, because why not just buy ATVI or TTWO, actually earn profits here and now, and enjoy a strong competitive position without the mall-store drag?

bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #258 on: March 25, 2021, 10:59:03 AM »
GameStop currently has a $10 billion market cap, with 70 million total shares.  Two years ago they had 100 million shares, so my wild guess is they print 30 million shares.  So instead of being worth $145/sh, they'd be worth $102/sh as they increase the number of shares by +42%.  But that's a wild guess: they could also be satisfied with printing 10 million shares, in which case the stock drops to $127/sh from +14% share dilution.

The delicious irony is that short sellers shorted GME stock around $20 (?) to the company in 2019 (?) which then retired the shares. Now, almost two years later the company can re-issue shares for a huge premium over their repurchase price.

I think there are regulations about companies trading in their own shares and this two year window would clearly not raise any red flags. I just love the irony of it all.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #259 on: March 25, 2021, 11:08:53 AM »
ChpBstrd - Chewy's co-founder Ryan Cohen joined GameStop's board with 2 of his colleagues in the second week of January (GME was $20/sh).  But Chewy has about a dozen fulfillment centers and a few customer service centers - a small footprint.

GameStop, on the other hand, has 5500 locations with 14,000 permanent and 22,000 to 42,000 part-time employees.  Those are retail salespeople and store managers - not software engineers.  All of that weighs on any plans to transform into a company with a smaller footprint - they're starting behind, not from zero.

Even if GameStop focuses on digital sales, I don't see that adding +650% value to the company, especially before they've shown results.  So even in the optimistic case of a pivot (starting behind, with retail locations), the stock has room to fall.


bwall - GME seems to get selling attacks above $300/share, so maybe there's another group of short sellers waiting there?

It looks like GME is heading strongly higher today, and I assume this is part of an attack that culminates Friday.  Tomorrow seems like an interesting day to open put spreads, if the stock keeps going up (on the news of future stock dilution!).

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4752
Re: GME deathwatch - how to profit?
« Reply #260 on: March 25, 2021, 11:27:41 AM »
I agree the stock has room to fall, even if they execute the perfect transition.

However, one of my 100% loss investments was buying puts on Netflix soon after they announced plans to invest in content creation. A firm whose core competencies are in logistics and running a website is going to produce movies? Yea right I thought. That's a completely different set of skills. My business textbook and Clayton Christensen's The Innovator's Dilemma all said they were going to fail at the transition, and I envisioned HBO, the TV networks, and Disney launching copycat services imminently. That must be why they were refusing to license content to Netflix and why everything on Netflix sucked. Plus, they were losing money at the time and it seemed like their demise was being accelerated by this desperate gambit to obtain content.

Lo and behold, Reed Hastings not only delivered, he produced multiple award-winning content series that blew away the competition's garbage in terms of quality. From the time I piled into puts, Netflix became the best large-cap investment of the decade.

No, GME is not at all likely to become Netflix circa 2010. But it is possible they raise funds to create content and hit a few home runs as rookies.

trollwithamustache

  • Handlebar Stache
  • *****
  • Posts: 1080
Re: GME deathwatch - how to profit?
« Reply #261 on: March 25, 2021, 04:29:06 PM »

No, GME is not at all likely to become Netflix circa 2010. But it is possible they raise funds to create content and hit a few home runs as rookies.

Are they really rookies? Gamestop has access to a lot of market information, ie what used games will sell, that can tell them what the other market participants might be missing.


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #262 on: March 25, 2021, 05:46:53 PM »
I don't see gamestop as content creators, but digital online middlemen. I think their transition will work out well.

That's long term.

I also think there is lot of room to go up in the short to medium term before it settles back to a fair valuation.

I don't think the shorts ever fully covered, and the attack like on March 10th to drop the price to 170 from 344 is evidence of that.  I think the squeeze is still in play.

I like the stock.

Disclaimer: long gme, this isn't financial advice.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #263 on: March 26, 2021, 06:59:07 AM »
I also think there is lot of room to go up in the short to medium term before it settles back to a fair valuation.
Would short to medium term cover the next few months and years?

GME is trading at $184/share right now.  It sounds like you expect GME to go upwards over the next few months and years - upwards from $184/share.

To me it looks like GME stock peaked in 2015, and has been declining since then.  Two years ago (Mar 25 2019) the stock was $10/share, and a year ago GME was $4.22/share.  The current price ($184/sh) reflects an +1700% gain in 2 years, or +4200% gain in 1 year.  I don't see any assets or actions that justify 43x in one year.  I see a declining retail store with a 400 P/E ratio.

I'll claim that Stream is the leader in selling games online (feel free to challenge that).  That online hub is owned by private company Valve, with a total company value of $10 billion.  GameStop's current market cap is $13 billion - is GameStop more valuable than Valve?  Is a retail chain that hasn't started to compete more valuable than the industry leader?

bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #264 on: March 26, 2021, 07:39:59 AM »
To me it looks like GME stock peaked in 2015, and has been declining since then.  Two years ago (Mar 25 2019) the stock was $10/share, and a year ago GME was $4.22/share.  The current price ($184/sh) reflects an +1700% gain in 2 years, or +4200% gain in 1 year.  I don't see any assets or actions that justify 43x in one year.  I see a declining retail store with a 400 P/E ratio.

Is a retail chain that hasn't started to compete more valuable than the industry leader?

It looked like GME peaked in 2015 b/c that's when the shorts really got going and unnaturally depressed the price--Melvin stated they began shorting in 2014. In 2019 the float was reduced by 30%, further increasing the 'natural' price. So, any share price in 2019 or 2020 was unnaturally low due to shorting, not due to Adam Smith's invisible hand of the market.

The way to get a read on the natural price of the stock is to go back to the pre-big-short price and see where the price was at that time. Then, review the annual balance sheet reports to see if they were profitable (or not) in the intervening years. If yes, then the 'natural, pre-short' is still today's 'natural, post-big-short price', adjusted for profits earned in the intervening years. If no, then subtract the losses from the pre-big-short market cap.

We won't get to the post-big-short natural price until everyone who wants to short GME has done so. in other words, how can GME ever fall below $100 if all the short positions opened above, say, $200, are closed out once GME hits $100? To me, GME appears to be a pinball driven up and down by shorts closing and opening positions.

In the meantime, if GME can raise some much needed cash to shore up their balance sheet by issuing shares at a much higher price than they bought them back for, then they have a fighting chance to live and fight another day.

Re; valuation: TSLA shows that insurgent companies (or companies viewed to be insurgent) can be valued much, much greater than industry leaders. I think that we can all agree that GME has shown the flaws in the 'rational market' theory.

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4752
Re: GME deathwatch - how to profit?
« Reply #265 on: March 26, 2021, 08:19:30 AM »
Re; valuation: TSLA shows that insurgent companies (or companies viewed to be insurgent) can be valued much, much greater than industry leaders. I think that we can all agree that GME has shown the flaws in the 'rational market' theory.

Funny thing is, GameStop has yet to articulate how they plan to be that insurgent (perhaps the money must come first?). We and everyone watching are speculating that they might manage to extract a few billion from their own short squeeze and use those funds to launch a new line of business that isnít in a state of rapid collapse. Weíre speculating on their speculations, and the success of their timing.

Worst of all, itís not like we ran a screener for companies that are raising funds to expand or launch promising new lines of business, and found GME to have the best prospectus. Most of us are only aware of GME because of the short squeeze, and our speculations are post hoc.

The world is full of companies that have found ways to borrow or issue shares and earn 15%-25% margins on those funds. These companies typically have strong existing businesses that can be scaled and expanded. GME owns a money pit and doesnít even have a plan yet.

frugalnacho

  • Walrus Stache
  • *******
  • Posts: 5028
  • Age: 39
  • Location: Metro Detroit
Re: GME deathwatch - how to profit?
« Reply #266 on: March 26, 2021, 08:24:10 AM »
All good points.  Counterpoint: me waiting to retire on my 0.12 shares


bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #267 on: March 26, 2021, 09:04:52 AM »
@ChpBstrd : I also agree that GME presents an attractive trading opportunity and an unattractive investing opportunity.



GME offers great case studies by proving clear lines of demarcation in  trading vs. investing, companies vs. stocks, rational market theory,  hazards of shorting (or over-shorting), and a clear display of the value and meaning of the saying 'markets can remain irrational longer than you can remain solvent.'

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #268 on: March 26, 2021, 10:42:29 AM »
bwall - Where is the evidence GameStop's stock price is entirely driven by short interest?  GME had $9.3B in sales in 2015, and $6.5B in 2019.  Customers didn't stop going to GameStop because of the short interest.

I disagree that GameStop is related to Tesla - I think that's a stretch.


frugalnacho - Hilarious!  I imagine that's got WSB approval, with the whole "to the moon" theme plus some interest in primates.

ChpBstrd - Thinking about online game sales, the industry leaders are already established.  Steam is the leader, with maybe Good Old Games and Amazon trailing behind.  And they could be losing ground to cell phone games, where Apple and Google have a huge moat: both wrote cell phone operating systems that now dominate the market.  Each has a monopoly over their app store.  None of which leaves a lot of room for GameStop to make money by being really late to opening an online store.

bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #269 on: March 26, 2021, 11:25:20 AM »
bwall - Where is the evidence GameStop's stock price is entirely driven by short interest?  GME had $9.3B in sales in 2015, and $6.5B in 2019.  Customers didn't stop going to GameStop because of the short interest.

hmmm....... I'd posted a link earlier somewhere about Melvin Capital opening their short position in 2014.... let me look for it again....

https://www.wsj.com/articles/melvin-capital-says-it-has-been-short-gamestop-since-2014-11613593854

Ok... there it is.... Plotkin testified before Congress that they'd been shorting GME since 2014. I think in 2019 the short interest hit 100% and then went to 140% due to the share buyback. That's when Roaring Kitty began banging the drum on WSB about GME. During that same time, the stock price dropped from $40 on July 1, 2014 to $5 on July 1, 2019. So, to me I'm making (perhaps incorrectly) the logical conclusion that the share price from from $40 to $5 occurred due to the increase in short interest from 5-10% to 140%.

What was GME's profit in FY2015? and in 2019? and in the intervening years? I have no idea. A quick glance at their income statement tells me they netted about $400m during those years, but that's by doing the math in my head. I might be off a few hundred million in either direction.

My point being: there was correlation to the increase in the short interest and the drop in the stock price. But was there also causation? I believe so. But, a reasonable person might look at the data and draw another conclusion, as is always the case in analyzing stocks.

BigMoneyJim

  • Bristles
  • ***
  • Posts: 368
  • Age: 52
  • Location: Nomadic retiree in the Rockies
    • Jim's Personal Finance Blog
Re: GME deathwatch - how to profit?
« Reply #270 on: March 26, 2021, 11:26:41 AM »
GME reminds me of TSLA in that it seems to be ridiculously overvalued based on fundamentals, but at least I get why TSLA has hype. I have hype about Tesla and its future as a company and business, too.

I have no idea if TSLA is a good investment at any particular price, but I think they're poised to do really well in consumer auto, commercial trucking, and in multiple industries related to their battery tech.

It's interesting to see these GME "what ifs" and be on the naysayer side. I'm not betting money that GME won't do really well, but I see no reason to expect them to prosper going forward.

I held a couple of shares of GME for a couple of weeks and sold at a 75%+ loss. I currently have no direct financial interest unless there are some shares hiding deep in one of my total-market index ETFs.

Reasons to doubt GME:

- App markets
  - Steam
  - iPhone app store
  - Google Play store
  - Steam wannabes like Epic, EA, Origin, GoG
  - Each gaming console has digital downloads in a locked-in market
  - Assorted digital entertainment appliances trying to tack on game downloads
- Automated kiosks like RedBox
- Other used physical product markets
  - eBay
  - Amazon
  - Craigslist
  - Facebook Marketplace
  - Nextdoor
  - Anyone who can throw up a Shopify store and manage inventory
  - Local boutique specialty shops (e.g. Pink Gorilla in Seattle)

I guess all the above boils down to the lack of barrier to entry to reselling used games or offering new games. Not only the lack of a barrier, but the proliferation of locked-in competitor markets on platforms where the consumer is already gaming or already spending time for other reasons (FB, etc.).

As far as "but they can start a new business model with their knowledge...": Ok, maybe, but I have no way of quantifying that outlook. And I'm not sure what GME's advantage is. I rather doubt GME has better consumer data than Apple, Google, and Valve, for example.

Edit: A tiny counterpoint: I just ordered a game from GameStop. It may arrive today. I got an old XBox 360 game for $10 plus another $5-$7 for shipping, taxes, and other microcosts. I already have this game on PC Steam, but the original console version is said to work better, and I have the console. I went to GameStop (online) partially because it was on my mind from all the GME talk and driving by a GameStop store on my way to grocery pickups. Also I feel reasonably confident they'll get a usable-quality game to me with little hassle and plenty of recourse if something goes wrong.

Counter-counterpoint: If not for the pandemic I would have driven to Pink Gorilla games to get it instead as I find the store and its varied inventory fun to visit.
« Last Edit: March 26, 2021, 11:33:07 AM by BigMoneyJim »

Psychstache

  • Handlebar Stache
  • *****
  • Posts: 1419
Re: GME deathwatch - how to profit?
« Reply #271 on: March 26, 2021, 11:39:05 AM »

I'll claim that Stream is the leader in selling games online (feel free to challenge that).

I accept the challenge and argue that Steam is the leader in selling games online =P

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #272 on: March 26, 2021, 11:51:39 AM »
I also think there is lot of room to go up in the short to medium term before it settles back to a fair valuation.
Would short to medium term cover the next few months and years?

Good question. Years is long term to me. Short meaning days, medium meaning weeks and months.

GME presents an attractive trading opportunity and an unattractive investing opportunity.

This is a good way to put it.

I think it's overvalued at the current price based on fundamentals of what the company is/does/will do in the future.

I also think it will go up from its current price, and I am long GME due to this.

All good points.  Counterpoint: me waiting to retire on my 0.12 shares



Hahaha. That ape is going to the moon.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #273 on: March 26, 2021, 11:51:05 PM »
My point being: there was correlation to the increase in the short interest and the drop in the stock price. But was there also causation? I believe so. But, a reasonable person might look at the data and draw another conclusion, as is always the case in analyzing stocks.
I'm taking the opposite view: declining companies attract short sellers, who would lose money if they picked a random company to short (and pay interest).

It sounds like the bull case for GME claims that short interest squeezes will push the stock higher, but Friday and the past 2 weeks just show slow declines.

@frugalnacho - Still funny, but the chimpanzee "Ham" rode a 20 min test flight and fell back to earth - never reaching the moon.
https://en.wikipedia.org/wiki/Ham_(chimpanzee)

Tesla makes money off electric cars they make, with a protective moat of their car design, battery tech, and charging stations.  Being worth more than the rest of the car industry is probably hype, but some of their +486% 12 month gain is real growth (12 month gains start with the pandemic, for context).

GameStop leads because nobody wants to sell games in brick-and-mortar stores.  They're still stuck in the past, and closed 20% of their stores in the past 5 years.  Meanwhile app stores and console downloads are the future, where they don't have a presence.  That doesn't add up to +4000% in 12 months, in my view.

Solvency concerns can be avoided with buying put options, which offer a fixed investment with the option to profit off a decline.  Even better is a put spread, where reduced cost comes from selling a put on the low end of your expectations.
« Last Edit: March 26, 2021, 11:57:37 PM by MustacheAndaHalf »

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #274 on: March 27, 2021, 12:08:06 AM »
It sounds like the bull case for GME claims that short interest squeezes will push the stock higher

Indeed.

Quote
but Friday and the past 2 weeks just show slow declines.

Indeed.

For the moment.

Early to mid-Feb wasn't looking so great either.

You're focused a lot on the company as a long term investment. I'm focused on it as a short term trade.

Do you see the activity around GME being totally done, and just continuing to decline in price? I don't.

As I said earlier, I think the March 10 massive selloff from 344 to 170 was evidence of short sellers still being quite interested in suppressing the price (someone who had a lot of shares and wanted to sell would have sold slower to maximize the price they got, no?).

I am willing to be totally wrong here, but I think there's a reason it's priced what it is, and I think there's reason to think it can go higher in the short term.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

ender

  • Walrus Stache
  • *******
  • Posts: 6992
Re: GME deathwatch - how to profit?
« Reply #275 on: March 27, 2021, 07:36:08 AM »
Everyone talking about Gamestop being dead makes me think of Best Buy.

Sure, some places died in this digital transition. But Best Buy managed to thrive.

Psychstache

  • Handlebar Stache
  • *****
  • Posts: 1419
Re: GME deathwatch - how to profit?
« Reply #276 on: March 27, 2021, 01:31:38 PM »
Everyone talking about Gamestop being dead makes me think of Best Buy.

Sure, some places died in this digital transition. But Best Buy managed to thrive.

That's because BB came up with an effective strategy to reposition themselves and create value for their consumers. I don't think either plan floating out there (become a direct competitor to Steam/XBox Gamepass/Nvidia GeForce, or become the Amazon of used/vintage video games) is very promising, but I not a business strategist.


MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #277 on: March 28, 2021, 02:55:00 AM »
Everyone talking about Gamestop being dead makes me think of Best Buy.
Everyone?  That's not accurate - how many posts in this thread say GameStop is "dead"?

Sure, some places died in this digital transition. But Best Buy managed to thrive.
Best Buy has gotten slightly more valuable in the past 3 months, returning +17%.  GME stock has gone up +800% in 3 months, making the company 9x more valuable.


I think it might be interesting to sum up GameStop's pro/con (as I know them):
+ Ryan Cohen, Chewy co-founder, joined the board with 2 co-workers
+ the board may pivot to digital sales, transforming the company
+ short squeeze may occur again
+ one stock analyst put a $175 price target on GME

- GameStop is up over 40x in one year, without doing anything
- overpriced relative to Steam, the leading seller of games online
- phone and consoles have built-in stores that are monopolies
- closing stores, declining sales, and no online presence
- requires buying pressure from WSB and others to stay at current price

My most recent GME put spread was $150 / $50, which means I think GME will fall to $50/share, but I lack confidence it will fall below that price.

bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #278 on: March 28, 2021, 05:46:08 AM »
Two years ago (Mar 25 2019) the stock was $10/share, and a year ago GME was $4.22/share.  The current price ($184/sh) reflects an +1700% gain in 2 years, or +4200% gain in 1 year.  I don't see any assets or actions that justify 43x in one year.

Best Buy has gotten slightly more valuable in the past 3 months, returning +17%.  GME stock has gone up +800% in 3 months, making the company 9x more valuable.

- GameStop is up over 40x in one year, without doing anything

The statistics about GME, while mathematically correct, are useless for the purpose of stock evaluation. Normally, the observation of  'price going up $X in a year', or "X% in this time frame", assumes that at the beginning of that period the stock price was in equilibrium with the fundamentals, or in a state of near equilibrium.

With 140% short interest at the beginning period of your analysis (one year ago and three months ago), I suggest that the stock was no longer trading in near equilibrium to the company's performance and/or fundamentals.

In order to adjust for the dislocation to the stock price caused by the 140% short interest, one must go back to a time before the shorts began crushing the stock. I provided a link upthread showing this was in 2014 when the stock was trading at $40, pre-30% share buyback.

Adjusting for the 30% share buyback would put an equilibrium price of $60 on GME stock. So, what are the observations with a base price of $60, instead of $4 or $5? : The stock has tripled as of right now ($181 closing price), but has pinballed between $120 and $240 in the past few weeks (or so) as the stock price seeks a new equilibrium, similar to 2014.

It will take months for GME to reach equilibrium again as the shorts, longs and options traders have fun earning and losing fortunes. They live for this kinda stuff and GME is the best rodeo they'll probably ever see in their entire lives, and they all know it.

In other words, since January, 2021, GME stock has traded based on the supply and demand of stock, and not based on fundamentals of the company. This state will remain much, much longer than any non-professional stock trader believes is possible.

This type of occurrence, where the stock becomes dislocated from the company, has been chronicled from time to time. I first read about it in Jim Cramer's "Confessions of a Street Addict". It's a highly informative (and entertaining) read. I can recommend it. Also: Jessie Livermore's "Reminisces of a Stock Operator".

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #279 on: March 28, 2021, 08:49:12 AM »
Bingo. As I said, right now trades aren't based on the fundamentals. Long term the stock market is a weighing machine. Short term it's a voting machine.

You're trying to weigh, M.5
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

ender

  • Walrus Stache
  • *******
  • Posts: 6992
Re: GME deathwatch - how to profit?
« Reply #280 on: March 28, 2021, 09:00:37 AM »
Best Buy is up 10x or so since their low in 2012 vs an overall market return of about 2x.

GME's fundamentals are way better than Best Buy's were at that point (where Best Buy was hemorrhaging money).

My point in bringing up GME and Best Buy comparison is that in the 2012 timeline, people assumed that BB was dead for nearly exactly the same reasons. What you listed applied almost exactly to Best Buy in that timeline.

Even @bwall said applies too, because the multiplier factor in the timeline can make data here result in whatever outcome you want.

If you see GME paralleling Best Buy's recovery and pivot in the future, it's entirely reasonable to expect a forward looking price point that is 10x what they were at their low point. If you see that low point as $4 then it's overpriced. But if $4 was artificially deflated for non-fundamental reasons, it's still cheap if you expect the same growth trajectory a company like Best Buy did.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #281 on: March 28, 2021, 10:10:22 AM »
BestBuy kept doing exactly what it had done before.  Who is claiming GameStop will be worth an order of magnitude more from just retail gaming stores?  And again, if it's such a great business, why are sales down and why did they cut 20% of their stores?

The price run up is not based on anything GameStop has done.


I provided a link upthread showing this was in 2014 when the stock was trading at $40, pre-30% share buyback.

Adjusting for the 30% share buyback would put an equilibrium price of $60 on GME stock.
That's not how stocks work.  You can't take the 2014 price and pretend that's what the price should be in 2021.  Your reference to the 2014 price as a fact is a distraction from your next step, extrapolating over 7 years, and assuming the price should not have changed in 7 years.  That's the problem.

It will take months for GME to reach equilibrium again as the shorts, longs and options traders have fun earning and losing fortunes. They live for this kinda stuff and GME is the best rodeo they'll probably ever see in their entire lives, and they all know it.
You think hedge funds are in the market for "the best rodeo"?
« Last Edit: March 28, 2021, 10:12:22 AM by MustacheAndaHalf »

bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #282 on: March 29, 2021, 05:46:10 AM »
I provided a link upthread showing this was in 2014 when the stock was trading at $40, pre-30% share buyback.

Adjusting for the 30% share buyback would put an equilibrium price of $60 on GME stock.
That's not how stocks work.  You can't take the 2014 price and pretend that's what the price should be in 2021.  Your reference to the 2014 price as a fact is a distraction from your next step, extrapolating over 7 years, and assuming the price should not have changed in 7 years.  That's the problem.

You think hedge funds are in the market for "the best rodeo"?

How else would you determine the 'natural' price for GME stock that can compensate for the 140% short interest? If you have a better method, please share.

The statement, 'GME is up 40x in a year, without doing anything' implies that the 40x stock price is somehow out of balance in regards to the previous price. I believe that with 140% of the float sold short, it was the year-ago stock price that was waaaay out of balance (and evidenced by the ensuing short squeeze), much more than the current stock price.

Rodeos: Yes. I believe that hedge funds want to make as much quick, easy money as fast as possible. They envision themselves as cowboys, bucking broncos on the wild west, taking enormous risks that no sane person would take in order to achieve their goals and having insane emotions that are hard to control (how would you react if your decisions led to $100m gains? Or losses?). I believe this because they say as much in books that they have written.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #283 on: March 29, 2021, 08:25:30 AM »
I provided a link upthread showing this was in 2014 when the stock was trading at $40, pre-30% share buyback.

Adjusting for the 30% share buyback would put an equilibrium price of $60 on GME stock.
That's not how stocks work.  You can't take the 2014 price and pretend that's what the price should be in 2021.  Your reference to the 2014 price as a fact is a distraction from your next step, extrapolating over 7 years, and assuming the price should not have changed in 7 years.  That's the problem.
How else would you determine the 'natural' price for GME stock that can compensate for the 140% short interest? If you have a better method, please share.
Look at the stock price.

Claiming 7 years of stock market prices are wrong still leaves the burden of proof on you.

frugalnacho

  • Walrus Stache
  • *******
  • Posts: 5028
  • Age: 39
  • Location: Metro Detroit
Re: GME deathwatch - how to profit?
« Reply #284 on: March 29, 2021, 08:38:46 AM »
I think you guys are talking past each other.  Should I be using the sale price of my house from 2008, or should I be using the sale price from when I purchased in 2010 as the basis for determining how much my house has appreciated relative to a fair market price?  One method shows 24% appreciation and one shows 149% appreciation.

bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #285 on: March 29, 2021, 09:13:28 AM »
@frugalnacho ; I think you're right.

Not every discussion has to end with agreement, I guess. It's what makes the world go round, after all.

Every day bears and bulls look at the same information and reach different conclusions. 

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #286 on: March 29, 2021, 01:03:51 PM »
I think you guys are talking past each other.  Should I be using the sale price of my house from 2008, or should I be using the sale price from when I purchased in 2010 as the basis for determining how much my house has appreciated relative to a fair market price?  One method shows 24% appreciation and one shows 149% appreciation.

Good post, FN.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #287 on: March 30, 2021, 09:10:02 AM »
Maybe I read Jim Kramer's book too long ago, because I mostly just remember he thought his wife was a better hedge fund manager than him.

To me, I think the stock market data needs to be considered accurate unless there's very strong proof otherwise.  I find it hard to believe a stock can diverge from fundamentals for 7 years - that buyers and sellers would be trading at the wrong price for that long.  Do you have examples of stocks that diverged from fundamentals more than say, 5 years?

If I need to prove something happened in January, I've got every news source in the world backing my claim - and Congressional hearings, too.  That's why I compare GME performance YTD and 1 year ago - because of widespread news coverage of what happened.

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4752
Re: GME deathwatch - how to profit?
« Reply #288 on: March 30, 2021, 12:11:41 PM »
To me, I think the stock market data needs to be considered accurate unless there's very strong proof otherwise.  I find it hard to believe a stock can diverge from fundamentals for 7 years - that buyers and sellers would be trading at the wrong price for that long.  Do you have examples of stocks that diverged from fundamentals more than say, 5 years?

The dot-com bubble comes to mind, but even it only lasted for 5-6 years at most. Yahoo.com went public in '96, so that was only a 4 year run. Qualcomm might be a better example - they went public in '91. All the Nasdaq stocks of the late 90's reflected erroneous estimates about earnings growth to occur several years in the future. Perhaps the market was still efficient because those erroneous estimates still incorporated all information available at that time?

The 7-year period of 1922-1929 also reflected erroneous estimates about the future. Almost nobody at the time foresaw how a collapse in margin loans would cause a banking crisis. The market, with all available information priced in, thought a different outcome would occur.

So I guess the question is, was the stock market wrong if the estimates about future earnings that supported its price were wrong? I'd say yes.

If a few tens of thousands of people think GME is going to earn $100/share five years from now, they alone can prop up the price, even if they are wrong. Therefore they and the price are both wrong. Stated another way, they are the market that is wrong (unless it turns out GME does earn $100/share five years from now, perhaps in a combo hyperinflation and vintage game collectible frenzy scenario?).

By now we should be used to the idea that many millions of people can believe incorrect / foolish things and predict the future poorly. They are the market. Anyone who hasn't sold out of any particular market is the market.


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #289 on: March 30, 2021, 12:30:36 PM »
The question being does the market being efficient imply the market is correct?

Regardless of the answer though, probably the larger concept relates to it being irrational longer than your solvency and it doesn't matter if the market is correct or not, you can't be more correct than it profitably, regularly.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

bwall

  • Handlebar Stache
  • *****
  • Posts: 1152
Re: GME deathwatch - how to profit?
« Reply #290 on: March 30, 2021, 01:42:35 PM »
I know the task was to name stocks whose prices had diverged from fundamentals for more than 7 years, but the markets for these products come to mind:

The market for gold traded without regard to fundamentals from 1944 to 1973 and there was no illicit market for gold.
The currencies of western countries (USD, GBP, FFR, DEM, ITL, CAD, JPY) also traded without regard to market fundamentals during this time and there was no black market for currency.
Communist bloc countries' currencies also traded without regards to fundamentals and a black market for other currencies did exist.

The market for crude oil also traded without regards to fundamentals until 1973. So much so that there was no futures market for oil until 1982 (!). For reference, coffee, sugar and cocoa futures began trading in the early 20th Century, and orange juice futures began trading in 1945.

I think that it's a great thought exercise. 


MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #291 on: March 31, 2021, 06:07:12 AM »
I know the task was to name stocks whose prices had diverged from fundamentals for more than 7 years, but the markets for these products come to mind:
I'd still be curious if there are examples of stocks that diverged from fundamentals for over a year.

The market for gold traded without regard to fundamentals from 1944 to 1973 and there was no illicit market for gold.
During the years you mention, it was illegal for Americans to own or trade gold.
https://en.wikipedia.org/wiki/Gold_Reserve_Act

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #292 on: March 31, 2021, 06:30:02 AM »
There's a lot of historical data to support the efficient market hypothesis, but the market keeps changing, so no theory of the market can ever be complete.  To me, the week after GameStop's January price spikes showed an efficient market at work.  The stock plunged as institutional money took advantage of inflated prices.

Note that to avoid solvency risk, people can buy "put options", which involves a fixed investment.  That's the maximum loss, which is what I've done in March (having learned the hard way in February).


@ChpBstrd - My focus was on one stock diverging from fundamentals for years.  With the dot-com bubble, there was real uncertainty over what the internet would be worth - and for whom.  Nobody got Amazon right - those who bought everything didn't invest enough, and those who stayed away missed it entirely.

But I think there might be a bubble involving one company: the East India Company, formed hundreds of years ago.  They had a trade monopoly, which helped ensure the bubble couldn't happen in other stocks.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #293 on: March 31, 2021, 09:40:42 AM »


There's a lot of historical data to support the efficient market hypothesis, but the market keeps changing, so no theory of the market can ever be complete.  To me, the week after GameStop's January price spikes showed an efficient market at work.  The stock plunged as institutional money took advantage of inflated prices.

Efficient, but maybe not correct.

What if short interest was still 100%+ at that point, and if prices stayed inflated margin calls come and it shoots up even more until it settles back to its natural price? That would have also been efficient, and perhaps more correct.

The problem is we don't have full information. A market can be correct or not only in hindsight--see your comment about Amazon and everyone getting it wrong. Amazon's price was efficient, was it correct? Who know e-commerce would be what it is, etc.

Gamestop settled into mid 40s for much of Feb. That was efficient. It's settled into upper 100s now. That is efficient. No?

Which is correct? Both? Neither?

And even if one is correct, the market can stay irrational. Maybe a correct short term price is 1000 when the shorts have to cover because they get margin called. Maybe a correct long term price is 30 based on book value. Or maybe it's 80 based on future cash flows.

That's the interesting thing, we're all making our own bets on what we think it's worth.

Or throwing our hands up and saying I'm not gonna try that game and buying index funds.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4752
Re: GME deathwatch - how to profit?
« Reply #294 on: March 31, 2021, 12:00:48 PM »
The question being does the market being efficient imply the market is correct?

@ChpBstrd - My focus was on one stock diverging from fundamentals for years.  With the dot-com bubble, there was real uncertainty over what the internet would be worth - and for whom.  Nobody got Amazon right - those who bought everything didn't invest enough, and those who stayed away missed it entirely.

But I think there might be a bubble involving one company: the East India Company, formed hundreds of years ago.  They had a trade monopoly, which helped ensure the bubble couldn't happen in other stocks.
There's a lot of historical data to support the efficient market hypothesis, but the market keeps changing, so no theory of the market can ever be complete.  To me, the week after GameStop's January price spikes showed an efficient market at work.  The stock plunged as institutional money took advantage of inflated prices.
...
@ChpBstrd - My focus was on one stock diverging from fundamentals for years.  With the dot-com bubble, there was real uncertainty over what the internet would be worth - and for whom.  Nobody got Amazon right - those who bought everything didn't invest enough, and those who stayed away missed it entirely.

Perhaps this is the gist of the question:

The efficient market hypothesis says that stock prices reflect all available information at the time. However, this would be true even if the information was incomplete or wrong. There exist facts and cause-effect destinies which are not available to us as information, and these hidden facts and destinies create the future at least as much as the information available to us.

In the 1920's it appeared that corporate earnings were going exponential, driven by the expansion of modern manufacturing, transportation, and management technologies. Information about the extent of investor leverage or the extent of bank vulnerability was not available to most investors, so that part of the story was incomplete. Buying stocks in 1928 was the wrong choice to make, but an incorporation of all available information would have led a person to that wrong choice. It was the same story for tech stocks in the 1990s or financial stocks in 2007.

Enron and Worldcom made sense until the information about them was shown to be incorrect.

When we say prices "diverge from fundamentals", the implication is there is information available that shows the price should be something different than it is. This could be a disagreement between the individual making that claim and the market over which specific bits of information should be emphasized or disregarded. I do not count such disagreements as violations of the EMH because I see the EMH as accounting for differences in individual psychology, constantly making some people buyers and other people sellers depending on their biases for various information types. Yet throughout the daily debates, the market arrives on a price that in the aggregate reflects the collective mind's estimation of value - given the available information. Thus there are stocks I wouldn't touch with a long stick which are being aggressively bought by other people, and vice versa.

What's tricky is that the market for a given asset only consists of those people who already own the asset (potential sellers) or want to own the asset (potential buyers). People who neither own or want the asset are out of the market and do not affect supply or demand for the asset. For example, there are zero dividend growth investors buying GME and AMC, so the market for these stocks consists of people who are emphasizing different types of information than dividend investors emphasize. Likewise, there are zero short-squeeze-targeters buying stocks with very low, or zero, short interest. Thus, the subset of investors who are buyers or sellers of a particular asset are comprised of people who are emphasizing different bits of information than the rest of the worldwide stock market's participants who are not buying or selling that specific asset. So it is possible that all the holders, or sellers, of an asset may be emphasizing the wrong information or information that will prove to be incorrect.

In this analysis, the definition of a bubble or an under/over priced stock would be an environment containing information which will later prove to be incorrect, or a marketplace comprised of investors who are emphasizing or disregarding the wrong information. Either way the investors can be wrong about future returns. They are the market, so the market is regularly wrong too (unless the market is right and then becomes wrong in a way that causes a loss for investors who made logical choices based on information). Any time the market drops, the decisions of millions of investors have proven to be incorrect, and yet they (mostly) made their decisions based on all available information.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #295 on: March 31, 2021, 12:20:42 PM »
Really good summation post Bstrd.

Any time the market drops, the decisions of millions of investors have proven to be incorrect, and yet they (mostly) made their decisions based on all available information.

Perhaps.

Of course, there are caveats (like new information coming to light).

They could have been right at the time.

Unknown unknowns.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #296 on: April 01, 2021, 07:32:58 AM »
Billions of dollars of GME stock are traded every day - sometimes more than the entire value of the company (which makes it easy to get out for short sellers, BTW).  I'm convinced WallStreetBets doesn't have that kind of money, so I believe there's some unknown hedge funds (or institutional money) trading GME.  Without knowing more about those hedge funds, it's hard to know where GME goes next.

In theory, only buyers and sellers determine the price of a stock.  But a market maker, according to a random post a read, can short a stock and spend up to 3 weeks finding stock to cover their short sale.  That was one of WSB complaints, that market makers could effectively create shares out of thin air.  There could also be institutional investors who normally just hold the stock, but are willing to loan it out to short sellers (and use derivatives to retain 100% exposure to the market).

And a crucial point that came up last week: the company itself can print more shares.  GameStop planned to do that back in December, and I can't imagine the reasons they'd be willing to sell shares at $15 but not at $150.  So an added risk is that all existing shareholders get diluted as more shares come to market.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #297 on: April 01, 2021, 11:23:41 PM »
Billions of dollars of GME stock are traded every day - sometimes more than the entire value of the company (which makes it easy to get out for short sellers, BTW).

It makes it easy for the shorts to get out if and only if it's not those short sellers already doing the trading by selling more short to suppress the price.

In other words, if they're constantly on the sell side of the equation, if they flip to the buy, the price rockets.

There's the normal day trading activity, but the shorts can't suddenly start to buy without the price going way up.

Quote
I'm convinced WallStreetBets doesn't have that kind of money, so I believe there's some unknown hedge funds (or institutional money) trading GME.  Without knowing more about those hedge funds, it's hard to know where GME goes next.

Right. There's almost definitely hedge funds on both sides, and the idea is that the shorts keep kicking the can down the road by shorting via synthetic shares (and hiding failure to delivers inside deep ITM calls, as you alluded to in your last post), but as they continually have to pay interest and pay for the options they're trading, the long hedge funds (like Blackrock) are bleeding them dry, especially by keeping the price near maximum pain so the shorts can't profit off of their calls and puts.

And then, eventually, the shorts have to cover.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5626
Re: GME deathwatch - how to profit?
« Reply #298 on: April 02, 2021, 03:40:15 AM »
Let's go to the data!

https://finance.yahoo.com/quote/GME/key-statistics?p=GME
Shares Short (Mar 14, 2021) 4   10.19M
Short Ratio (Mar 14, 2021) 4   0.25
Short % of Float (Mar 14, 2021) 4   44.60%
Short % of Shares Outstanding (Mar 14, 2021) 4   15.60%
Shares Short (prior month Feb 11, 2021) 4   16.47M

What I see is a significant decline in "Shares Short", dropping 38% from Feb 11 to Mar 14.  It looks like hedge funds are reducing their short positions.


Billions of dollars of GME stock are traded every day - sometimes more than the entire value of the company (which makes it easy to get out for short sellers, BTW).
In other words, if they're constantly on the sell side of the equation, if they flip to the buy, the price rockets.

There's the normal day trading activity, but the shorts can't suddenly start to buy without the price going way up.
Does it have to be all or none?  Many hedge funds could be involved, and one of them could decide to reduce their position slightly.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28442
  • Age: -999
  • Location: Seattle, WA
Re: GME deathwatch - how to profit?
« Reply #299 on: April 02, 2021, 10:03:51 AM »
There is significant reason to think those numbers do not accurately represent the actual amount of short shares.

The SEC has a paper about how the Hedge Funds can reset failure to delivers.

https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf

Essentially the short Hedge Funds (SHF) can "close" their shorts, say they've closed them, then have a certain amount of time to deliver those shares. If they take too long, it becomes a "failure to deliver" (FTD) (iirc after 3 weeks?).

What they can do--per that paper (and evidence we've seen)--is then reset the clock on the FTD so that they have a new gap of time to deliver. And then repeat that X amount of time later (again, I think around 3 weeks, but you can look this up).

It's been discussed a lot on Reddit, I literally just threw out two links from the last day or two at the bottom of this post that I'm copy/pasting from to save time, but there's a lot more explanation over the last few weeks if you want to go dig it up.

What the SHF can do, per that paper, is either of these type of options trades:
"- A buy-write trade, i.e. selling deep ITM call + buying a synthetic long share from MM
- Buying a married put: buying an option put with a synthetic share."

Why would you buy these calls instead of shares, what's the difference? -- Calls don't change the share price and calls can reset the FTD. You immediately exercise the calls via synthetic short shares on the other side of the trade, and now you use these executed shares to show you've "covered" your short. Weeks later you have a FTD on your synthetic shorts you used to make the trade, so you do it again.

We've seen this actually happen. A whole bunch of calls were bought for $14, 15, 16, 17, 18, etc. just this week for an April 16 expiration. Who is buying millions of dollars of deeply ITM calls?

For the last few months, on a very cyclical pattern, we've seen this happen, deep ITM calls to be immediately exercised to hide FTDs. Indicating there are a LOT more shorts out there than being reported, because they don't have to report those numbers, they just keep kicking the can down the road.

Another example--Melvin Capital revealed 6,000,000 puts in their SEC filing from February--quite likely to have been used for this method.

The SEC put out that paper for regulators to look for activity like that, but the SHFs can and are use it as a playbook.

In my opinion, there's reason to think the short positions are much higher than the data you quoted.

Sources:
https://www.reddit.com/r/GME/comments/mi31m6/deep_itm_calls_activity_pt2_april_1st_708000_ftds/
https://www.reddit.com/r/GME/comments/mibedc/the_moass_wont_happen_until_options_are_not/

I think the reported numbers don't tell the whole story. Anyways, I doubt I'll defend this much, so if you disagree, all good. If the evidence isn't compelling to you, sure, I can see that. We'll agree to disagree for now, and see what happens. :)
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.