It’s not just individual investors participating in latest squeeze, observers say
Another options-fueled buying frenzy appeared to be sending shares of GameStop Corp. and other “meme” stocks soaring on Thursday. But unlike last month’s market-rattling move, it wasn’t clear that individual investors were the primary driver.
The primary mechanism, however, appeared largely the same.
A surge in purchases of GameStop call options, centered on those with a strike price of $60 and due to expire at the end of the week, was seen late Wednesday afternoon, said Gust Kepler, chief executive of BlackBoxStocks, a stock-and-options analytics and social platform. That triggered an alert sent by BlackBoxStocks at 3:27 p.m. Eastern, he said. Another alert was triggered early Thursday by heavy interest in calls with a $125 strike price.
The company tracks options buying activity, with an eye toward large institutional buyers. Concerted activity by individual investors can also be picked up as brokers, which are part of the institutional universe, move to fill orders. The recent activity appeared to likely be a combination of big, professional players as well as individual buyers, Kepler said, in an interview.
‘Gamma squeeze’
A call option is a financial instrument that gives the holder the right, but not the obligation, to buy the underlying security at a set price, known as the strike price, by a certain date. By buying far “out of the money” calls, which have a strike price well above the stock’s present level, investors are betting that a surge in the stock price will net them a healthy profit.
Buying far out of the money calls is usually a losing proposition, analysts noted, and a surge in interest can make the strategy more expensive as premiums rise in response to demand.
But the options buying can, under certain circumstances, create conditions in which a price rally feeds on itself. Known as a “gamma squeeze,” this occurs when the sellers of the call options, in order to hedge their positions, buy the underlying stock. As the price of the stock rises, they need to buy more to maintain their hedge, creating the feedback loop.
GameStop shares soared in late afternoon trade Wednesday, prompting trading halts before it ended with a gain of 104%.Nearly 65 million shares changed hands, with volume surging as the closing bell neared, compared with a recent average daily volume of 14.7 million shares. GameStop shares popped as much as 85% at Thursday’s opening bell. Gains were trimmed by the close, but it still finished at $108.73, up more than 18%.
Where are the shorts?
GameStop, which ended last year near $17 a share, soared as high as $483 in late January as concerted buying efforts initiated by individual investors on Reddit’s WallStreetBets forum contributed to a short squeeze, forcing traders who had bet on falling stock prices to cover their positions, adding to the buying frenzy.
GameStop shares subsequently fell back, trading below $40 a share last week. The late-January episode briefly rattled financial markets, triggered investigations and brought additional scrutiny, including a high-profile congressional hearing, on online brokers, market makers, and other players.
It’s also brought attention to the broader role individual investors are playing and the possibility of a sustained pickup in retail interest that could alter market dynamics over the long run.
The broader stock marketsaw steep lossesthat deepened ahead of the closing bell, though the tech-led fall was blamed largely on a sharp jump in Treasury yields. The Dow Jones Industrial Average dropped nearly 560 points, or 1.8%. The S&P 500 fell 2.4%, while the Nasdaq Composite dropped 3.5%.
Some market watchers, however, saw a possible but not clear-cut link between the GameStop activity and the selloff.
GameStop might still be a popular short among some hedge funds, said Thomas Lee, managing partner and head of research at Fundstrat Global Advisors, in a Thursday note. That could be fostering a repeat of the late-January “degrossing” episode, in which hedge funds sold assets in order to reduce leverage, in keeping with “value-at-risk” models.
Meanwhile, other market watchers questioned how much fuel existed for for a repeat short squeeze, noting a sharp fall in short interest and expectations that remaining shorts are more adequately hedged against sharp moves.
Short interest in GameStop had reached 140% in January, but has since fallen back closer to 30%, noted Edward Moya, senior market analyst at brokerage Oanda, in a note, observing that professional investors likely also see an opportunity near options expiration dates following last month’s action.
“One thing is clear, the institutional money behind this move found options expiration as a pivotal opportunity that will make it easier for market disruptions,” Moya wrote. “The violent price swings might remain elevated around options expirations for the Reddit-WallStreetBets crowd.”