This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.
As the meme stock mania 2.0 enters its second day, records are being broken left, right, and center. However, the nemesis of retail traders - those pesky institutional short-sellers - are not falling into the gamma trap for now, which will, in all likelihood, cap the gains in GameStop, AMC, and the other retail-favorite names, if all else remains equal.
GameStop's Implied Volatility Is Rising A Lot Faster Than It Did During The 2021 Historical Run
GameStop Corp. Class A is currently at $60.38, up $29.93 or 98.29%
❖ Up 444.45% month-to-date
❖ Up 244.44% year-to-date
❖ Up 503.2% from its 52-week closing low of $10.01 on April 22, 2024
❖ Would be highest close since Nov. 22, 2021, when it closed at $61.89
❖ On…— *Walter Bloomberg (@DeItaone) May 14, 2024
GameStop made records during today's pre-market trading session, with the stock up over 500 percent relative to its 52-week low (closing price) of $10.01 on the 22nd of April, 2024.
IV in $GME seemed to react much faster that in '21. As you can see here at-the-money IV's are near 300%.
I think this may work against '21 style meme'ing as higher IV's deter call buyers. pic.twitter.com/xpfi9Z7jHV
— SpotGamma (@spotgamma) May 14, 2024
However, as noted by SpotGamma, the rate of increase in GameStop's implied volatility is eclipsing that witnessed during the meme stock mania of 2021.
Notice that GameStop's implied volatility for 30-DTE (Days To Expiration) options is substantially outpacing its historical volatility for 20-DTE options.
Also, notice that in 2021, GameStop's 30-day average implied volatility (IV) took 3 weeks to max out. This time around, however, the stock's implied volatility has exceeded 50 percent of 2021's peak IV within just 48 hours!
This rapid pace of increase in implied volatility is inflating the values of out-of-the-money call options on GameStop, rendering a sustained gamma squeeze that much more difficult. As a refresher, a gamma squeeze is a negative feedback loop wherein a large accumulation of out-of-the-money call option buying activity in a stock forces the dealers to hedge their negative-delta exposure by buying the underlying stock, which creates more upside and reinforces the feedback loop.
GameStop $GME short sellers are currently set to lose more than $1.2 billion on paper today at $48.75 (+54%) premarket & more than $2B on paper since Monday - Ortex$GME is up over 450%, including pre-market gains of 100%, since May 2nd. [Be Careful Fam]
Short Sellers: 😭 pic.twitter.com/EQvdpmpxAy
— Wall St Engine (@wallstengine) May 14, 2024
GameStop short-sellers are now sitting at around $2 billion in paper losses since Monday. For reference, the stock's short interest was sitting at around 27 percent of the float on the 30th of April.
For the record @SquawkCNBC @BeckyQuick the $GME short position is ~1/5 the size it was in 2021.
While there is pain for shorts, at a 17.3% short interest ratio this is not a short squeeze driven story in its current iteration. pic.twitter.com/Bsyd4VQn4f— Tom Hearden (@followtheh) May 14, 2024
Overall though, the losses appear manageable, courtesy of the relatively subdued 17.3 percent current short interest in GameStop shares.
For now, the biggest winner from GameStop's explosion appears to be its CEO, Ryan Cohen, whose net worth has increased by around $1 billion since Monday.
At the time of writing, the stock is again trading at around $52 per share after reaching a peak of $80 in the pre-market.
Remember Gamestop is a STOCK connected to a company that has had flat revenues and gross profits for almost four years. It is true that if it could try to get in a giant offering here it could reinvent as something else but if it was any good Best Buy would have bought them ages…
— Jim Cramer (@jimcramer) May 14, 2024
On a lighter note, the Cramer curse is now working against the overhang from elevated implied volatility.
Affinity Moves
GameStop's meteoric rise has led to an explosion in the popularity of other stocks as well, including Alibaba and AMC Entertainment.
Interestingly, AMC raised $250 million earlier today by selling 72.5 million shares at an average price of $3.45 per share.
GS HF VIP longs vs most short puked by ~6% yesterday.
JEF’s Mike Toomey: HF long/short spread now -7.8%, a -4.2σ move…the worst day since 2021 and 3rd worst single day in the last decade. pic.twitter.com/tVb7ZkOROa
— Yaron Naymark (@1MainCapital) May 14, 2024
Of course, given the breadth of these moves, the short basket of hedge funds is now chronically underperforming the long basket by around 7.8 percent, which constitutes a 4.2 standard deviation move.
The last $GME mania was in January 2021. Despite the bust in GME that month, the S&P 500 rose for 7 straight months afterwards and didn't peak until the following January; rising 29% in that time. pic.twitter.com/gssVSsjYBI
— ForexLive (@ForexLive) May 14, 2024
On the bright side, the meme stock mania of 2021 did result in extended gains for the S&P 500, which bodes well for the market's immediate prospects.
