‘Weaponised’ options trading turbocharges GameStop’s dizzying rally; Reddit-Fueled Traders Trigger Volatility Halts Across Market

Jan 27, 2021

$27,651/$300,000 (9.2%)
Elizabeth Cook and Robin Trott

Observations & Insight

Editor’s Note: Coverage today is more than a little heavy on the GameStop/Reddit story currently unfolding. Usually we’d condense this but it is such a remarkable story with so many perspectives here is the whole nine yards. Whatever your position, it is certainly interesting and unique. It’s not all GameStop though. Our version of “Where’s Waldo.”

Lead Stories

‘Weaponised’ options trading turbocharges GameStop’s dizzying rally; Retailer’s shares more than double in single day, leaving them up almost 1,800% in 2021
Robin Wigglesworth – FT
GameStop’s rocket-fuelled trading this month, which has taken the stock’s gain in 2021 to almost 1,800 per cent, is a vivid example of how a new army of day traders have “weaponised” financial derivatives to their advantage. The game retailer’s stock had catapulted 135 per cent by midday trading in New York on Wednesday, to $353, extending a recent spree of gains that sent it zooming higher from its 2020 closing price below $19 a share. One user with the moniker DeepFuckingValue on the popular Reddit forum WallStreetBets posted screenshots on Tuesday showing how he had turned about $50,000 worth of GameStop call options — which give the holder a right to buy a stock at a certain price, and function much like a leveraged bet — into nearly $23m this year.

Reddit-Fueled Traders Trigger Volatility Halts Across Market
Bailey Lipschultz – Bloomberg
About 44 circuit-breaker halts were triggered in the first two hours of trading Wednesday amid the rapid ascension of amateur investors armed with Robinhood and their favorite social media platforms.
From cult-favorite GameStop Corp. to stereo headphone and loudspeaker retailer Koss Corp., trading volume soared as gains and losses fluctuated by the minute.

How GameStop’s Reddit- and Options-Fueled Stock Rally Happened; The videogames retailer has become a favorite of online traders seeking to make money from buying options
Alexander Osipovich – WSJ
Shares of a handful of firms such as GameStop Corp. GME 92.71% and BlackBerry Ltd. have posted triple-digit gains in recent weeks, part of a frenzy whipped up by individual investors. Here’s what you need to know. Why is GameStop up? Shares of GameStop are up more than sevenfold in 2021, compared with a 2.5% rise in the S&P 500. The Grapevine, Texas, videogames retailer has become a favorite of online traders who invest in companies championed on the Reddit forum WallStreetBets.

Short Sellers Crushed Like Never Before as Retail Army Charges
Justina Lee – Bloomberg
Short traders in the American stock market are taking a historic pounding as the retail crowd charges into the most-hated names on Wall Street.
The 50 most-shorted companies on the Russell 3000 Index have now surged 33% so far this year, with the Goldman Sachs Group Inc. basket set for its best month since at least 2008.
Whether it’s the Reddit trader army or the inescapable fate of bears in this market, this year’s rally is following one rule: The more hated a firm, the more loved the stock.

Reddit-Led Obsession With Hated GameStop (GME), Blackberry, Moves to Options
Katherine Greifeld – Bloomberg
The Reddit-led hunt for heavily shorted stocks is migrating to the options market.
The most-hated stocks have scorched the naysayers, with a Goldman Sachs Group Inc. basket set for its best month since at least 2008. That’s been accompanied by a “dramatic shift” in options activity toward heavily-shorted securities such as GameStop Corp., BlackBerry Ltd. and Palantir Technologies Inc., according to Barclays Plc analysts.

BlackRock may have raked in $2.4 bln on GameStop’s retail-driven stock frenzy
BlackRock Inc, the world’s largest asset manager, could have made gains of about $2.4 billion on its investment in GameStop Corp as retail investors pour money into the video-game retailer’s shares.

GameStop extends Reddit driven hyper-rally after Musk tweet
Susan Mathew and Shreyashi Sanyal – Reuters
Amateur investors piled further into niche stocks on Tuesday, sending professional short sellers scrambling to cover losing bets, with GameStop skyrocketing for a fourth straight day, thanks in part to Elon Musk.
GameStop surged 50% in extended trade after Musk tweeted “Gamestonk!!”, along with a link to Reddit’s Wallstreetbets stock trading discussion group, where supporters affectionately refer to the Tesla CEO as “Papa Musk.” “Stonks” is a tongue-in-cheek term for stocks widely used on social media.

Bond Vigilante Stalks Asia Treasuries Market With Risk-Reversal Trades
Stephen Spratt – Bloomberg
A Treasuries bear has bulldozed its way through the normally sedate Asian options market.
Over the past six sessions, a large trade known as a risk-reversal has been established, buying bearish put options on 10-year Treasuries and selling bullish calls. The bets total 50,000 contracts, a notional value of $5 billion, and stand to profit from a rise in benchmark yields to about the 1.37% level.

Exchanges and Clearing

Nasdaq Decodes: Tech Trends 2021
Discover the technology trends that are driving the global markets forward
COVID-19 accelerated societal and technological changes at a pace we never imagined.
At the onset of the pandemic, market volatility surged and volumes soared. Nasdaq topped several records across its markets, including the U.S. equities market experiencing its highest volume day since 2009, reaching about 5 billion messages, which was about two times its previous all-time high. The Options market recorded ten of its most active days ever, peaking at about 62 billion messages on a single day.

Exchange operator Nasdaq beats profit estimates on trading strength
Exchange operator Nasdaq Inc reported a better-than-expected quarterly profit on Wednesday, benefiting from a surge in trading volumes as the COVID-19 pandemic caused market volatility.

Nasdaq earnings boosted by option trading
Micah Maidenberg – MarketWatch
Nasdaq Inc. said its performance in the fourth quarter was helped along by rising demand among investors for option trading. The stock-exchange operator on Wednesday reported a profit of $224 million, or $1.34 a share, up from $202 million, or $1.21 a share, for the year-earlier period. After excluding expenses tied to merger initiatives, amortization of some assets and other making other adjustments, Nasdaq generated earnings of $1.60 a share, ahead of expectations from analysts polled by FactSet. Net revenues increased 22% to $788 million from $646 million, less transaction-based expenses, the New York-company said, surpassing the $755 million consensus estimate.

India’s NSE for the second year in the row is the world’s largest derivatives exchange
National Stock Exchange of India Ltd. (NSE)
National Stock Exchange of India Ltd. (NSE) for the second year in the row has emerged as the world’s largest derivatives exchange in 2020 by number of contracts traded based on the statistics maintained by Futures Industry Association (FIA), a derivatives trade body. NSE is ranked 4th in the world in cash equities by number of trades as per the statistics maintained by the World Federation of Exchanges (WFE) for calendar year 2020.

Regulation & Enforcement

Biden’s Candidate for SEC Chairman Is Expected to Be Tough on Companies; Gary Gensler could beef up the regulator’s enforcement efforts and push for new disclosure requirements
Mark Maurer – WSJ
Gary Gensler, President Biden’s pick to run the Securities and Exchange Commission, is expected to seek higher fines and new disclosure requirements on public companies, lawyers and former regulators say. Mr. Biden nominated Mr. Gensler earlier this month to head the agency that oversees U.S. securities markets, succeeding Jay Clayton. The Senate needs to confirm his choice for it to take effect, a process for which there is still no confirmed timeline. Last week, Mr. Biden named SEC Commissioner Allison Herren Lee to serve as acting chairwoman in the interim. Mr. Gensler headed the U.S. Commodity Futures Trading Commission from 2009 to 2014, at which time he spearheaded the creation of a new regulatory framework for derivatives. Prior to running the CFTC, he had spent 18 years at Goldman Sachs Group Inc., where he rose to co-head of finance, and later served in the Treasury Department during the Clinton administration.

GameStop Trading Could Be ‘Systematically Wrong,’ State Regulator Says
Avi Salzman – Barron’s
The top securities regulator in Massachusetts thinks trading in GameStop stock, which has been skyrocketing, suggests there is something “systemically wrong” with the options trading surrounding the stock. The videogame retailer’s stock was up 93% on Tuesday and has roughly quadrupled in the past week. It was up another 40% in after-hours trading Tuesday, to eclipse $200. Traders have been bragging on online forums about taking large bets on the stock using options—often out-of-the-money calls that pay off only if the stock soars.

Will WallStreetBets Face SEC Scrutiny After GameStop Rally?
Matt Levine – Bloomberg
Of course the chart of GameStop Corp.’s stock price from yesterday is nuts. It closed on Friday at $65.01, opened yesterday at $96.73, got as high as $159.18 and as low as $61.13, and closed at $76.79. Almost 178 million shares traded, worth almost $17 billion. GameStop’s 10-day realized volatility is 308%. I am typing these words before the market opens on Tuesday, but by the time I send them the stock will have been trading for hours, and I am sure that it will have touched $4 and $4,000 and every number in between. It seems meaningless to talk about the price of GameStop stock, as though a single number could represent such an elusive concept. GameStop stock has all the prices at once.


Inside Volatility Trading: Market Wisdom
Kevin Davitt – Cboe blog
When I was still new to the derivatives business, I remember a risk manager asking, “Do you want to be right, or do you want to make money?” In my mind, I wanted both. His point, which became clear in time (as a result of managing losses and personal reflection) was obvious: our ego can be our own worst enemy.
Attribution bias is an unconscious mental tendency to credit positive outcomes to personal skills and poor outcomes to random luck. Others refer to the tendency as “Egonomics.” That term was originally coined by Thomas Schelling. He was a brilliant polymath and Master of Game Theory. Schelling advocated for “pre-commitments,” whereby individuals set out to make decisions earlier than usual with an emphasis on “focal points.” Focal points, in this context, are the pre-determined paths people choose absent other knowledge/communication. Schelling’s example involved attempts to meet a stranger in New York city without the ability to communicate when or where. Focal points are “natural” solutions to problems without the ability to coordinate. Grand Central Station at noon anyone?

Foreign Exchange: A Market by Christopher Nolan*
Frank Kaberna – tastytrade
Entering the foreign exchange market is like watching a Christopher Nolan movie for the first time. What’s the timeline here? How does this development affect the other plot lines? Is Leonardo Dicaprio’s character even alive? It can be difficult to make heads or tails of how these two universes’ innerworkings actually affect each other. Starting with the US dollar can help to reduce complexity for many new traders, especially when looking at Small US Dollar (SFX) futures that are diversified against seven foreign currencies (including euro, Chinese renminbi, Japanese yen, and more). One character. One narrative.


Reddit GameStop (GME) Stocks: How ‘Flows Before Pros’ Disrupts Stock Markets
Tracy Alloway – Bloomberg
It seems inevitable that the populist forces that have disrupted almost everything else in recent years would eventually arrive to democratize investing. But the sheer impact of retail trading has been shocking, primarily to financial professionals who appear ill-equipped to deal with it. Organizing via social media, the amateurs have been able to send so-called “meme stocks” like GameStop Corp. soaring, while hedge funds that have been betting against the chosen companies are in pain. Some worry that the battle between the “flows” generated by small investors and the “pros,” or professionals, are artificially pumping stocks higher in a feedback loop that could lead to a collapse. Others worry the wild trading is ruining the purpose of capital markets entirely: the efficient allocation of capital.

Fundamentals of Futures & Options Virtual Course
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This instructor-led virtual course includes lectures from an engaging instructor with real-world expertise and supported by class discussion, practice exercises and educational materials. The course fee includes two must-read industry books – Futures and Options and the Guide to U.S. Futures Regulation.
Presenter: Marti Tirinnanzi, Board of Director of ICE Mortgage Services
Time: January 25-29, 12:00 – 2:00 p.m. ET; 2 hours per day for five consecutive days


GFF Summit: A cordial invitation and some valuable information
Frank Ghast – Eurex
I hope you are all safe and sound and that I will see many of you at Clearstream and Eurex’s joint Global Funding and Financing (GFF) Summit 2021 from Tuesday, 2 February, to Thursday, 4 February 2021 – even if, unfortunately, only virtually this year. In the ramp-up to the summit, let me take the opportunity to quickly recap 2020 and take a look at what’s ahead.

The SEC’s new derivatives rule: practical implications for funds
The SEC recently adopted Rule 18f-4 under the 1940 Act, which will establish a comprehensive framework for the use of derivatives transactions by registered funds. The rule will replace SEC guidance and staff no-action letters that together have governed the use of derivatives by registered funds for over 40 years with an expansive regulatory framework. Funds will not need to come into compliance with the rule until the summer of 2022, but most fund families will need to devote significant time and resources to prepare for the new regulatory framework in advance of the compliance date.
Presenters: Kenneth Holston, Partner, K&L Gates; Stephen Humenik, Partner, K&L Gates; Michael McGrath, Partner, K&L Gates; Fatima Sulaiman, Partner, K&L Gates
Time: Thursday, 25 February 2021 | 10:00 a.m. – 11:00 a.m. EST


Reddit traders wage battle against Wall Street; Investors and former regulators are growing concerned over rising impact on broader market
Eric Platt and Colby Smith – FT
An army of amateur traders has launched a siege on Wall Street that has shaken up markets and left seasoned hedge funds reeling. This new legion of day traders, equipped with free trading platforms, spare cash, and boredom, has set its sights on a growing list of US-listed companies over the past several weeks. GameStop, a games retailer whose shares have been sent flying by gangs of traders co-ordinating moves on Reddit, sits at ground zero of a battle that has shown these have-a-go investors are no longer just a sideshow.

(Podcast) OIR Interviews: Inside The Retail Options Explosion
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