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https://dubra.substack.com/p/wallstreetbets-the-new-kids-on-the

 

Think about it. If you have 1.6 million ‘degenerates’ each with $10,000 in their Robinhood accounts (or even $1,200 of Trump Bucks) and these ‘degenerates’ are actively buying OTM calls, even if 1% of them participate that’s a lot of marginal buying power.

 

Imagine being the poor option market maker at Citadel or Susquehanna. You might suddenly see $250 million worth of notional buying activity happen in OTM calls in minutes for no apparent reason. Then, as a market maker what do you have to do now that you are short $250 million notional of some stock via options? Delta hedge.

 

In this case, that means you have to buy the underlying stock. As the stock rises, the option delta rises, which requires more buying by the market maker - a virtuous cycle. WSB just took what could have been a relatively small sum of money, multiplied it once via options and then again via the option market maker.

 

In essence, WSB can become the tail wagging the dog. It’s brilliant! And more than that, it is so ultra-contrarian that no traditional market participant (except Softbank) would ever consider doing this. This is what I mean when I say they hacked Wall Street.

 

Considering how thin some stocks can be, it is no surprise we are seeing parabolic moves driven by underlying call buying.

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https://dubra.substack.com/p/wallstreetbets-the-new-kids-on-the

 

Think about it. If you have 1.6 million ‘degenerates’ each with $10,000 in their Robinhood accounts (or even $1,200 of Trump Bucks) and these ‘degenerates’ are actively buying OTM calls, even if 1% of them participate that’s a lot of marginal buying power.

 

Imagine being the poor option market maker at Citadel or Susquehanna. You might suddenly see $250 million worth of notional buying activity happen in OTM calls in minutes for no apparent reason. Then, as a market maker what do you have to do now that you are short $250 million notional of some stock via options? Delta hedge.

 

In this case, that means you have to buy the underlying stock. As the stock rises, the option delta rises, which requires more buying by the market maker - a virtuous cycle. WSB just took what could have been a relatively small sum of money, multiplied it once via options and then again via the option market maker.

 

In essence, WSB can become the tail wagging the dog. It’s brilliant! And more than that, it is so ultra-contrarian that no traditional market participant (except Softbank) would ever consider doing this. This is what I mean when I say they hacked Wall Street.

 

Considering how thin some stocks can be, it is no surprise we are seeing parabolic moves driven by underlying call buying.

 

This has basically been my mental model for what is going on for some time.

 

If you compare this to bucket shops from 100 years ago, the speculative environment was very similar with one very important exception. To the best of my knowledge, the bucket shop trades were never executed on any exchange and had no mechanism to feedback in to the value of the underlying exchange traded security.

 

Today the speculative environment is very similar, but today's option trades are executed and visible on exchanges, and there are multiple pathways for the options trades to feedback in to and effect the market price of the underlying security.

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WSB loves Anacott Steel.

 

 

 

I know I repeat myself, but repetition is sincerest form of flattery.

 

Nice joke, but more similar to Anaconda Copper in my opinion due to the prevalence of bucket shops.

 

Great speculation

 

In 1928, Ryan and Rockefeller aggressively speculated on Anaconda shares by manipulating the supply of copper (reducing supply to corner the market), causing shares to go up at first; at which point they sold, which caused stocks to fall; then buying them back. Known today as a "pump and dump", at the time the actions were not illegal and took place frequently. Anaconda was producing copper at such a rate they had tremendous stockpiles. To control prices, the company only sold the requested supply. Under the pressure of a "joint account" set up by Ryan and Rockefeller of nearly a million and a half shares of Anaconda Copper Company, prices fluctuated from $40 in December 1928, to $128 in March 1929. Selling large volumes of shares rather quickly causes the bottom to fall out of the market; investors lose confidence and dump their shares, causing a domino effect. Small investors would purchase blocks of shares on credit, and when they could not sell at or above the given price, had to sell the shares at a loss when the banks called on their loans for the purchase of said shares.

 

Smaller investors were completely wiped out. The results are still considered one of the greatest fleecings in Wall Street history. The United States Senate held hearings on the stock manipulations, concluding that those operations cost the public at the very least, $150 million. A 1933 Senate banking committee called these operations the greatest frauds in American banking history, a leading cause of the 1929 stock market crash and 1930s depression.[citation needed]

https://en.wikipedia.org/wiki/Anaconda_Copper

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Comment from a PLTR thread today:

 

Settle down boomers and back away. The tards are in control now. Profits, long term outlook? Meaningless. Does the CEO look weird? Does the ticker name have a cool abbreviation? Do we think the share value is close enough to $69 that we can pump it there?

 

The dumber you are, the dipshittier your thinking, the more you can make. Put yourself in the shoes of a man who huffs canned air and passes out in the Walmart parking lot and channel his semiconscious brainwaves into insane yolo's. If your wife and kids aren't berating you every day for putting every last cent on the line, you're not going dumb enough.

 

Haha.

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Didn’t Tesla just pass Facebook in market cap? Meanwhile Bury recently built a short position. But after all that is what defines speculative frenzy - buying something only for the story. It is true the world will be transformed with electrification of everything and it will be remarkable. But you can tell that story when Tesla is at 30b and when Tesla is at 1T, but there’s a difference between the two:)

 

Take a look at what is happening with GME. WSB is pumping the stock for a short squeeze that might rival what happened with VW. I was looking at buying puts but the implied volatility is 200%!

 

Is there a sweet spot market cap threshold? How does one explain Tesla?

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Doesn't the delta hedge thing cut both ways?

 

Like if sentiment turns for whatever reason and the stock becomes less bullish or even bearish, wouldn't the market maker sell the stock to avoid being overhedged?

 

These days it feels like there are Cheshire cats all over the place seducing folks to imagine...

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Doesn't the delta hedge thing cut both ways?

 

Like if sentiment turns for whatever reason and the stock becomes less bullish or even bearish, wouldn't the market maker sell the stock to avoid being overhedged?

 

These days it feels like there are Cheshire cats all over the place seducing folks to imagine...

 

Yes. Yes it would.

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Tesla, Facebook, BTC, Tencent, and Alibaba all trade within a market cap of 0.6-0.8T. Much of the bitch is because at these market caps, they are more valuable than BRK, TSMC, Samsung, Visa & Walmart - old timer favorites. Hence, these upstarts must all have BS valuations, how do I exploit that?

 

Yes, the valuations are high, but so are the valuations of the favorites. The rising tide of unlimited QE and stimulus lifts ALL boats, not just the Teslas, Facebooks, etc. The problem is the relative ranking, and that is very much BOTH an industrial revolution, AND a demographics thing.

 

Back in the day steam replaced sail. The 'go-go' stocks of the time were the railway, steamship, and arms companies, plus anyone supplying materials to those rapidly growing industries. The dogs were the those supplying material to the displacing industries. Same thing is happening today - yes the darlings are overvalued, but fundamentally? by not as much as many think.

 

Yes, yes, it's different this time, I've heard that before! Bitch less, and actually look around you. THE major oil companies ALL getting out of oil and into green energy, THE major auto manufacturers ALL switching from IC line-ups to electric, THE major IT companies (& their big clients) ALL switching to blockchain based solutions. It IS different this time around, and the pace of change is accelerating - yet old timers think this should not affect relative market caps? Irrationality is not just in the market, it is widespread.

 

Sure the inexperienced will make mistakes; when you were just starting out you knew squat as well. But back then, other people were the fat cats and you didn't know they even existed - today .... you're the fat cat!. Lots of ways to feast, but you have to be able to live with yourself afterwards. For most people, it will just mean giving the gains away to worthy endeavors. 'Go Fund Me' campaigns raise the amounts they do, for a reason.

 

Not what most want to hear.

 

SD

 

 

 

 

 

 

 

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Back in the day steam replaced sail. The 'go-go' stocks of the time were the railway, steamship, and arms companies, plus anyone supplying materials to those rapidly growing industries. The dogs were the those supplying material to the displacing industries. Same thing is happening today - yes the darlings are overvalued, but fundamentally? by not as much as many think.

 

Ah yes. I fondly remember the Railway Mania days.

 

Speculative fervour pervaded all sections of society and blurred class divides. ‘Men who were known to have been penniless a year before, suddenly kept their broughams or started barouches. Valuable diamonds gleamed from fingers which had hitherto been guiltless of the bright adornment.’ Female speculators also became a common sight, ‘Duchesses’ delicate fingers handled scrip; old maids inquired with trembling eagerness the price of stocks; young ladies’ eyes ceased to scan the marriage list – deserting this for the table of shares, and startling their lovers with questions respecting the operations of bulls and bears.’

 

https://www.winton.com/longer-view/railway-mania

 

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Great article thanks for posting.

 

Fascinating how the WSB crowd seemed to take advantage of the delta hedging aspect - although how to separate this from

pure crowd buying seems tough.

 

And I don't detect the slightest amount of arrogance, overconfidence, delusion or impatience on WSB. 

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At some point aren’t the people pumping stocks on WSB just as guilty of market manipulation as any sleezy penny stock promoter.  I don’t care I’m not going to go long or short either way (ok maybe I’ll sell puts on AMC but...), but at some point there will be more than enough evidence to accuse the really well followed redditors on WSB that do this repeatedly of market manipulation? 

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LOl Melvin capital now got a bailout. You can’t make this up.

https://www.wsj.com/articles/citadel-point72-to-invest-2-75-billion-into-melvin-capital-management-11611604340

 

This is “Occupy Wall Street” done right. Every short seller now has a target on his back. The inability to short because it has become way to risky could have some interesting ramifications for the market. This might be short term bullish but medium and long term not so much, as some institutions may just quit altogether until this blows over.

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At some point aren’t the people pumping stocks on WSB just as guilty of market manipulation as any sleezy penny stock promoter.  I don’t care I’m not going to go long or short either way (ok maybe I’ll sell puts on AMC but...), but at some point there will be more than enough evidence to accuse the really well followed redditors on WSB that do this repeatedly of market manipulation?

 

This is what I've been wondering. I think it's harder to pin on anyone since there's no one single orchestrator, but yes - it's a similar effect. I imagine regulations will have to change to reflect the scale of social media platforms.

 

I mean despite the scant warnings against market manipulation, you have a ton of guys on these sites who are now aware of gamma and it's effects and who are purposefully bidding up names like GME simply to burn the shorts and not because of any fundamentals.

 

Was on a BB thread on WSB today, someone mentioned BB's press release how the company wasn't aware of any reason why the stock price would rise and the response was "as long as the stock keeps rising, who gives a f*ck".

 

These guys are just there for the momentum - not any belief in the underlying fundamentals at this point.

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The gang at Wall Street Bets have found an inefficiency in the market and they are exploiting it. Just like lots of very profitable hedge funds and investors do all the time. The difference is there is much more transparency (of some kinds)...

 

The regulators will make a call on if rule changes are required.

 

Over time we should expect the ‘alpha’ to be competed/regulated away like all money making strategies that work.

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Just my opinion, but I don't think this whole Wall Street Bets things is a lasting paradigm. To steal from some book titles, I would be cautious about believing that this brave new world is the end of history. Imagine all the folks who were talking about a 'new normal' during the tech bubble.

 

I think the story is as much about Melvin Capital's huge blowup as it is about anything else. $2.75 billion is just a huge number for a hedge fund bailout. The infamous LTCM bailout was ~$3.6 billion (not adjusted for inflation)

 

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Here's one for you flywheel fans:

 

The more WSB's stunts work, the more people hear about them.

 

The bigger the WSB forums gets (gained over 1.3m members in a couple days, and lots of non-registered lurkers), the bigger the stunts they can pull become.

 

Rinse & repeat.

 

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Just my opinion, but I don't think this whole Wall Street Bets things is a lasting paradigm. To steal from some book titles, I would be cautious about believing that this brave new world is the end of history. Imagine all the folks who were talking about a 'new normal' during the tech bubble.

 

I think the story is as much about Melvin Capital's huge blowup as it is about anything else. $2.75 billion is just a huge number for a hedge fund bailout. The infamous LTCM bailout was ~$3.6 billion (not adjusted for inflation)

 

I agree. SEC is going to come down on market makers IMO. Not that they're the ones at fault here, but they certainly contributed to the effect and the rules for how they offer/manage options exposure will change from here.

 

Also, I think there might be further fuel to burn for internet platforms being responsible for the content they host - we're already hearing about that on Facebook/Twitter do to the political riots and etc. Now we've got redditors potentially destroying the livelihoods of legitimate market participants just because they wanted to. No one feels bad for billionaire hedge fund owners, but I guarantee there were retail traders short this as well and this sort of thing shouldn't really be allowed.

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