The driver in the GME situation is the information that the stock is short sold. Both the toaster coil shortage and the short sale information are both just pieces of information that may be true or false. But people act on that information.
A guy in WSB told the story about how he bought a coffee stock because the company said that the inventory was short. Later, the company reported that one of the warehouses wasn’t counted in the number and the inventory was actually abundant. The price fell and the WSBer was wiped out of any profit. The inventory number was information that turned out to be false. But he, and I’m sure others, acted on that information.
It’s also possible that some people bought GME because they disagree about the fundamentals of the stock. I read from one guy who writes a newsletter who thinks that Gamestop will become more popular if the country goes into a recession because he thinks that online gaming will be seen as a luxury, so old consoles will become more valuable.
Also from that article:
and the money quote
And yet, supposedly, the author of the article thinks that the government either should or will investigate DFV for buying his stock from his basement while hedge fund companies buy the trade information from brokers without the knowledge of the investors, and somehow that’s not worth investigating.
It’s well known that the big players have an advantage in the stock market game since the game is rigged. That’s the reason that some of the Redditors and some other retail investors are doing everything they can to level the playing field.
I don’t doubt that institutional investors made some money on GME. I also don’t doubt that there may have been some retail investors who lost some money on GME. But I do question whether it’s possible to know, as you stated, that Redditors in the aggregate lost money on GME, especially the Redditors described in the article as sophisticated traders and not the Redditors that flooded the sub after the stock was already on the decline.
As an aside, the amount of stock brokerage ads on Reddit since the GME situation has been crazy.
Unless of course, you’re a hedge fund trader. Then you can lose an infinite amount of money, even more than you have, and nothing happens. If you lose some, other hedge firms will bail you out. If you really lose big, the government will bail you out. And you can do all of this while wiping out the equity of the people whose money you’re trading with.
We were discussing whether and to what extent it’s possible to make money on a short squeeze situation. In that context, the two situations are fundamentally different.
If the only thing that caused the stock to go up is the short squeeze buying pressure, then the subsequent selling pressure will force it down to that same extent, so it will ultimately return to the pre-short squeeze price, and the more people attempt to cash in at higher prices, the faster it will decline to the prior price. But if there’s a reason for the price increase outside of the short squeeze - e.g. a coil shortage - then the price is now fundamentally higher, and would eventually settle at that higher price, to the benefit of anyone who bought in prior to the knowledge about the shortage becoming public.
No, we weren’t. You can trace back the conversation by clicking on the uplinks (uparrow-yay Discourse!) in every post on the right hand corner. Tracing it all the way back to post #143, the quote this discussion emanated from was this:
The question of whether it’s possible to make money on a short squeeze is a different question. That’s a more nebulous question, and one you’ve answered multiple times in the exchange. You think it’s possible to make money for hedge fund traders in a short squeeze, so it’s possible. The question you’re saying you’re exploring isn’t very clear. Making money by whom? In a zero sum game, someone is making money and someone is losing. So yes, someone is making money.
I’m also finding your argument about the value of something based on the efficient market hypothesis more assumptive than persuasive.
Using tulip mania as an example of a bubble.
According to this article, on Tulip mania, the contracts had some in common with the short sales,
From Tulip mania, one of the first bubbles where the price of something increased and decreased rapidly.
If there’s a contract for someone to buy something that is in limited supply, that’s the law of supply and demand working as expected, so the value should increase for that commodity. The information about the contracts is supplying the value.
Once the contracts expire, what’s the value of the commodity then? People talk about the price being based on the “fundamentals”.
I know from previous discussions we’ve had, that you’ve been a skeptic of models (in the case of coronavirus). I share your skepticism. The “fundamental value” is just a model based on a prediction. By whom? Is it based on the predictions of hedge fund traders? The people who have trailed the market nine years in a row?
I’m still skeptical.
This may not be totally related but this sentence from the wiki made me laugh.
A lot of people are betting on that “nothing.” lol
In other related news, in a survey, many Americans are rooting for the Redditors and many Americans feel that the stock market is rigged in favor of large investors.
In more current news, there are a lot more questions than answers about what happened with the GMEstock. Congress is set to hear some testimony on Thursday.
That was a while ago. The immediate subject of the discussion was whether and how the group we’re collectively calling “Redditors” was going to profit from this short squeeze, and to that end I/we addressed how one makes money from a short squeeze generally.
My point in this context was that selling on the way down would have the same effect on prices as buying on the way up, all else being equal. Examples of all else not being equal would be pressuring a short to close his position without attracting the attention of other shorts who open new positions, but also - whether there has been a genuine change in the company’s prospects, such that the new fundamentals-driven price is going to be higher than the prior price. That was the case in the example you cited, where the price is initially being by a change in supply availability, and the short squeeze was secondary, but it is not the case with Gamestop.
Of course. I think I’ve been clear on that all along.
I think that collectively, those who sold based on skepticism of the short squeeze strategy will collectively make money and those who bought based on enthusiasm over
that strategy will collectively lose money. (I’m calling the latter group “Redditors”.)
I’m very skeptical of all models, including those purporting to assess stock prices based on fundamentals. (Ultimately, the model results are derived from other sources, mostly gut feeling, and the models are easily rigged to provide the desired answer based on changes to key assumptions.)
The fundamental value has nothing to do with models. It’s about the market based price, which is based on the price set collectively by the buyers and sellers in the marketplace, to the extent that the buyers and sellers are doing so based on their belief as to the fundamentals. Each individual buyer and seller has their own view as to the fundamental value of the stock, and most or all of them are wrong. But the price point derived from the collective buying and selling pressure is the fundamental market-driven price of the stock. This is to be distinguished from buying pressure which is specifically not based on anyone’s assessment as to fundamental value but is instead based on a very temporary disruption.
Regardless of people’s motivation for buying or selling, anyone who bought in on the way up drove the price up. Since hedge funds were bearish on the stock until the rise, any hedge funds that made money that day bought stock in the frenzy, adding to the price increase. You’re calling those hedge fund traders Redditors, making the designation lose all meaning…
Fundamentals are just exactly what you described models do. Fundamentals analysis is basically modeling. Some of qualitative analysis in fundamentals analysis is “gut feeling.”
Any fundamentals price is just the price at which an analyst believes the price should be.
An analogy might be a term like fundamentals-based coronavirus deaths. Deaths from coronavirus just are. What the numbers of deaths should be or would be given a number of predictors is modeling.
The market price of a stock is simply the most current price the stock was transacted at. The fundamentals price is just the prediction of someone about where that stock should be priced based on their estimate.
In current news, Keith Gill aka RoaringKitty aka DFV testified to Congress today. He said that he didn’t pump the stock. He just “likes the stock.” He also said that he’s working on his own.
The CEO of Reddit also testified about Reddit, its policies and r/wallstreetbets in particular. He explained how Reddit works. He also noted that there was not any unusual activity with bots on the site that week. They also combed the site for Reddit violations and didn’t find any.
They’re so cute when they’re trying to be serious.
Does anyone understand what’s going on now? I haven’t read about it much, but I saw some posts that said that the spike and fall of GME a few weeks ago was not from closing out short positions but from gamma squeeze, which is something related to calls by market makers that I don’t understand. And since then, the brokers are reporting a massive failure to deliver to the SEC every day, which sounds like the big boys are just deciding not to buy the stocks they’re obligated to buy and everyone is letting them get away with it. Reddit still thinks the squeeze is yet to happen, and given that GME doubled today (and seems to have doubled again in after market trading) it does seem like something is happening, but I’m way out of date on this.
WSB is divided on whether this is another squeeze in the making or whether it is just a normal jump caused by the departure of the CFO exacerbated by people thinking it was a squeeze.
Gamma Squeeze: From what I understand. If you sell a buy option, it gives the purchaser an option to buy a certain number of shares at say $150. If the shares are currently $100, your risk is minimal. If the price starts rising and the option looks like it’s going to be exercised you run the numbers and start hedging. You purchase a few shares at 110, a few at 120 ect. The hedging you are doing is also putting upward momentum on the share price. So it’s working against your best interest, but it can also save you.
This is obviously all done with complex mathematical equations, but if there are a lot of buy options floating around out there and something sets them off (like removing a bad CFO) a snowballing can happen on the price as hedging the options can create it’s own rising price. Now the people who sold $200 options have to start worrying and hedging.
Gamma being the ratio of the change in option price to the change in underlying price. When an option is greatly in-the-money, this is close to one, as almost all the value of the option is in the inherent value, and little is in the value of the volatility of the stock, so the option moves in almost lockstep with the underlying. When an option is greatly out-of-the-money, it’s close to zero, as it will take a very large movement of price to make the inherent value pop above zero so a slight movement in that direction is of little concern. At in-between prices it the gamma will be somewhere in between, and represents the fraction of the shares contracted in a call option a market maker in options has to buy to delta-hedge their position in the stock (ie, not care what happens to the price of it), as it says what percentage the value the option they sold will go up compared to the price of the underlying, which they buy to hedge the selling of the call. They care about the price of the option they sold because they’re likely to buy the option back to clear their books rather than wait for it to expire or get exercised.
And so as the price of the stock rises, the gamma of the options with close strike prices rise, and the market makers having written options at that strike price need to buy more shares based on those outstanding options, which drives up the price more. At some point, the gamma of options with a certain strike price will be almost one and so it won’t feed on itself so much, but at that point then the options for the next strike price in the series have their gammas starting to get a bit more above zero.
GME rallying hard again today - wonder if the exchanges or regulators will step in this time? DFV/RoaringKitty bought an extra $2M in shares at $40 after telling congress that he would buy at that price - he was already a living legend on Reddit but this surely cements his status as a god amongst men on WSB.
And I doubt that FP’s the only one, and that’s why I think this run can’t last and the GME bulls are going to get torched. Some will make off with a nice pile of cash for sure, but a lot of others are going to be hurting and there may not be a third wave.
I’m a believer that ultimately, P/E ratios do matter – maybe not quite in the same way they used to, but I’ve already been through one “new economy” and watched that bubble pop all over the place. This is nothing more than a wild speculative economy we’re living in, padded no doubt by fed and treasury infusions. The euphoria won’t last forever.
I’ve been seeing this recently in several places. What would they do? They can’t regulate against price fluctuations.
Would that make you a Redditor?
The day’s range went up to $348.5 You missed it by >< that much.
In what way? We won’t even look at Tesla, although you could. But how about Facebook, Google, Twitter and all the other social media corporations that have ad revenue as their main source of income. Ad revenue is really volatile because boycotts could make advertisers stop funding the corps. Are all of those overvalued?
We might need to redefine what a good P/E ratio means – might not necessarily be what Buffett and Munger say it is. But when companies have “value” that would take a company decades to earn in actual profits…that’s the shoeshine boy’s stock tip.
