Deep F______ Value

[Saluki]

With the initial Game Stop short squeeze, which has been the topic of numerous news reports and even a couple of documentaries, there were more shares shorted than available.  This set up the super squeeze.  It also set up a problem that almost wiped out Robinhood because all that trading in volatile options required net capital which they didn't have available to post. 

 

I never worked at an investment bank but I think a lot of the problem was the reflexivity in the markets that Soros talks about. Yes, if a company is in trouble and it's stock goes up a lot, then you can sell shares and now you're not in trouble anymore.  That's good.  But it's a double edged sword. If the people on the other side of those option trades are the people who do it for a living and want to run a balanced book, not YOLO trades, then they need to hedge the position as it moves.  (Delta Hedging).

 

If they sold a bunch of options (100mm notional shares) that has a 5% chance of finishing in the money, they will likely buy 5mm of the common to hedge it.  If goes up a lot and now has a 50% chance of finishing in the money, they don't want to get caught out, so they will hedge buy buying another 45mm to hedge.  But that massive buying drives up the price so they have to buy more.  Reflexivity. 

 

So when the Roaring Kitty crowd starts cashing in their chips, those same traders will sell off their hedges and drive the price down. The lower price means they need fewer shares to hedge their position, so they sell more, and it's reflexivity the other way. 

 

It's obviously going to end in an ugly way.  If, like me, you don't want to go long or short this train wreck, is there some other play here that isn't obvious but will be affected, good or bad, when the trade goes the other way?  Like the Robinhood stress etc. 

[gfp]

So that article seems to confirm that the social media accounts are still controlled by Gill and that he has such a large bankroll this time around because he (as most people would have assumed) put a large call option position on before his weird twitter videos sent GME up last month.  And he has already pumped and dumped once in the last 60 days so one would expect that is the plan this time around.

[gfp]

3 hours ago, oscarazocar said:

 

How do you know he hasn't exited the call position?  Some cursory browsing indicates that the open interest is recalculated once each day.  If he exercised the options and sold the stock, would we know that now or would we have to wait until the open interest is updated?

 

He has not exited the call position -

 

[Blake Hampton]

Is this illegal?

[gfp]

5 minutes ago, blakehampton said:

Is this illegal?

Probably not

[rohitc99]

26 minutes ago, gfp said:

Probably not

My guess is that for this kind of play, he would be smart enough to get laywers before the trade and someone could even be staking him 

[aws]

 Matt Levine weighs in:

 

I have, over the past few years, had surprisingly many occasions to ponder the following question: If you had a magic lamp that allowed you to move up the price of a liquid publicly traded stock arbitrarily, by a large amount, a handful of times, what would you do with it? There’s some stock that trades at $20, and you could rub the lamp and it would go to $30 for like a day or two: What do you do?

I think there is a theoretically correct answer, though it is neither investing nor legal nor magical advice. It goes like this:

Spend all of your money on somewhat out-of-the-money short-dated call options on the stock.

Rub the lamp.

Sell the options.

This maximizes your leverage in the trade: Instead of paying $20 to buy the stock, you pay (say) $1 to buy out-of-the-money options struck at say $25. You rub the lamp, the stock jumps to $30, the options jump to (say) $6, and you sell them all. You’ve made a 500% return using options instead of a 50% return by buying stock.

There is a legal nuance here, though I stress that nothing here is legal advice. The legal nuance is that, in the real world, there are no magic lamps. In the real world, the way to actually move publicly traded stocks is mostly by making public statements to people who care about what you have to say (and who buy stock).

What you do not want to do, in this scenario, is make public statements to the effect of “this company has discovered a cure for cancer and I’m bullish for the long term.” Because Step 3 is selling your options, and if you say stuff like that then you are lying and could get in trouble. What you want to do is make a somewhat inscrutable public statement. Ideally the public statement can be read to mean “I have bought a ton of options on this stock, I am not giving you any advice about anything, and I’m gonna go sell them at a profit right now,” but can also be read in other, more bullish ways. Ideally other people read your statement and go out and buy the stock, so you can sell.

The modern US equity market has two main guys with lamps, Elon Musk and Keith Gill. Here’s Gill:

GameStop Corp. shares surged after the Reddit account that drove the meme-stock mania of 2021 posted what appeared to be a $116 million position in the video-game retailer.

The June 2 screenshot posted by Keith Gill, who goes by a profane handle involving the phrase Deep Value on Reddit, shows a stake of 5 million shares with an average cost basis of $21.27 apiece. A position that large would make Gill one of the company’s five biggest investors and is more than six times the number of shares his account showed in an April 2021 post, the last time it was active on Reddit, when accounting for a four-for-one stock split.

The screenshot, which also included 120,000 call options worth $65.7 million due to expire on June 21, couldn’t be verified. The options would allow him to buy the stock at $20 a share, but would cost him some $240 million to exercise.

Here’s the Reddit post, disclosing 5 million shares bought at an average cost of $21.274 per share ($106.4 million total) and 120,000 options contracts (on 12 million shares), all June 21 calls struck at $20, at an average cost of $5.6754 per share ($68.1 million total). As Bloomberg News reports, the numbers are not verified, but they seem to match actual market activity:

Individual trades over the past two weeks show there are several block trades for 5,000 contracts each, according to data compiled by Bloomberg. Applying a so-called volume weighted average price, the price of $5.67 per contract — a total cost of around $68 million — gets very close to what Gill posted on Reddit.

Those trades were not exactly what my strategy suggests — the short-dated options were somewhat in-the-money when he bought them, and he bought shares too — but close enough. He paid about $174.5 million for the position. This morning, GameStop’s stock got as high as $40.50, and those calls got as high as $21.10. At those prices, Gill had a paper gain of about $281 million. Also:

On X, Gill also posted an image of a reverse card from the game UNO that indicates a player is changing the card-pickup direction. The post had attracted 6.5 million views in the 12 hours since its publication at about 8 p.m. Sunday New York time.

I don’t know what the Uno card means! If I bought a giant pile of GameStop options and then magically made the price double, I would promptly sell those options. If the method I used to magically double the price was by publicly posting my giant position on Reddit, I might, in an extremely not-legal-advice sort of way, want to also publicly post a disclaimer to the effect of “I make no representations about how long I will hold this position, and for all you know I’m selling right now.” Would posting a green Uno reverse card accomplish that goal? I would want to ask a very specialized sort of lawyer that question.

To be clear, this is just what I would do. I have no idea what Gill is doing. Probably he likes the stock and is in it for the long term. As of 1 p.m. today, only about 6,000 June 21 $20 call options contracts had changed hands, so it doesn’t seem like there’s a lot of options selling. Really I don’t know what to think beyond, like, “isn’t this weird” and “maybe nobody should have a magic lamp that can arbitrarily move stock prices.” A few questions, though:

Where did he get the $174.5 million? That’s a lot of money! As far as I can tell his wealth peaked in the eight figures in the 2021 GameStop mania, so … did he find more? Is someone financing this trade?

Why is he not making the case for GameStop on YouTube? Gill seems to be back on Twitter/X (as Roaring Kitty) and on Reddit (as “a profane handle involving the phrase Deep Value”), but his YouTube channel (also Roaring Kitty), where he did most of his advocacy for GameStop in long detailed videos in 2021, is still dormant.

You see where I’m going with Questions 1 and 2, right? If you had a lot of money and a taste for danger, how much would Keith Gill’s X account be worth to you? How much would his Reddit account be worth to you? How much would his YouTube account be worth to you? (Do you look and sound like him?) If you had the X and Reddit accounts, would those constitute a magic lamp in your hands? How would you most efficiently monetize it? If you were Gill, how would you most efficiently monetize your accounts? Is the answer “sell them to a whale”?

Those $20 calls are now very in-the-money. Is Gill going to exercise them, by coming up with another $240 million? You can hold GameStop stock forever, but you can only hold GameStop June 21 calls until June 21. After that, you need the $240 million, unless you sell the options first.1 This is not a diamond-hands position; this is, by its nature, a sell-while-the-selling-is-good position.

Of course if Gill did exercise the options — finding another $240 million wherever he found the previous $174.5 million — he would own 17 million shares of GameStop, or roughly 5% of the outstanding stock. It would be funny if he went activist and demanded a board seat on a platform of “more chaos.”

If you were an options market maker, and last week a retail account came to you to buy multiple 5,000-contract chunks of one-month at-the-money GameStop options, how would you have thought about pricing? How wide would your bid-ask spread be? How would you hedge? Would you have carried any gamma risk into the weekend? Who would you guess the buyer was?

[whatstheofficerproblem]

This is illegal imo. He knew that the market would react, so he deliberately bought options and then posted the 'Uno Reverse' meme, and later showcased his $200M position in GME which caused another rally that more than doubled the money to $500M. E* Trade is looking into blocking him from trading.

[gfp]

22 minutes ago, whatstheofficerproblem said:

This is illegal imo. He knew that the market would react, so he deliberately bought options and then posted the 'Uno Reverse' meme, and later showcased his $200M position in GME which caused another rally that more than doubled the money to $500M. E* Trade is looking into blocking him from trading.

 

What is illegal about it?  Icahn and Ackman and Buffett and Elliott and ValuAct know that the market will react when a new position is made public.

 

 

[whatstheofficerproblem]

On 6/3/2024 at 5:02 PM, gfp said:

What is illegal about it?

 

Well, more often than not, the funds you mention have equity stake that they plan to use to for activist measure to further shareholder interests. You can argue that DFV is doing the same, but only $115M is in shares, the rest of the ~$100M is in call options with a big deal of them having a date of June 19th/21st. I wonder what meaningful activism one can do in that span of time.

Edited June 6 by whatstheofficerproblem

[aws]

The only way I see legal troubles for DFV is if he colluded with other parties before starting the scheme. Either financial backers who also jumped in and amplified the effect of his return, or social media stock promoters who hyped the implications of it. If it was just the organic result of his followers, where is the crime?

 

I'm sure it would be a fun case for the lawyers to argue in court. 

[Stuart D]

I don’t know if it’s legal or not, but it seems kind of slimy like the pump & dump crypto adds you see on twitter. 
 

I don’t really understand why he’s doing it though. You’ve got $100m, why shine a spotlight on yourself.
 

Upside: $100m becomes $200m. Change to your day-to-day life = zero.
 

Downside: you spend the next few years defending yourself in court (if something goes wrong).

 

Is it really worth it? Even if the chances of being sued are low, I just don’t get the risk reward.

[matthew2129]

19 hours ago, gfp said:

 

What is illegal about it?  Icahn and Ackman and Buffett and Elliott and ValuAct know that the market will react when a new position is made public.

 

 

Read Section 9 and 10 of the 34 Act....

[Castanza]

17 hours ago, Stuart D said:

I don’t know if it’s legal or not, but it seems kind of slimy like the pump & dump crypto adds you see on twitter. 
 

I don’t really understand why he’s doing it though. You’ve got $100m, why shine a spotlight on yourself.
 

Upside: $100m becomes $200m. Change to your day-to-day life = zero.
 

Downside: you spend the next few years defending yourself in court (if something goes wrong).

 

Is it really worth it? Even if the chances of being sued are low, I just don’t get the risk reward.

 

Agreed, pretty bizarre behavior considering he was already targeted once. 5 years at market returns gets you to ~160m. 

[gfp]

On 6/4/2024 at 2:43 PM, matthew2129 said:

Read Section 9 and 10 of the 34 Act....

 

I did, because you asked me to, and I didn't find anything that would apply to his unique case.

 

https://www.wsj.com/finance/regulation/keith-gills-gamestop-trades-pose-conundrum-for-market-cops-70cc5301?mod=hp_lead_pos4

 

https://www.nyse.com/publicdocs/nyse/regulation/nyse/sea34.pdf

Edited June 6 by gfp

[ValueArb]

3 hours ago, gfp said:

 

I did, because you asked me to, and I didn't find anything that would apply to his unique case.

 

https://www.wsj.com/finance/regulation/keith-gills-gamestop-trades-pose-conundrum-for-market-cops-70cc5301?mod=hp_lead_pos4

 

https://www.nyse.com/publicdocs/nyse/regulation/nyse/sea34.pdf

 

 

Yea, both sections require showing intent to mislead/manipulate, which is going to be incredibly hard to show here. And what is the difference between buying shares/options on GME because you think the price is going to go up, and doing it because you think others will drive the price up in a mad rush after you reveal your purchase? Should Keith Gill be banned from owning GME because of how others react to his trades?

 

Keith Gill clearly has the right to publicly say "I like the stock" or post memes to that effect while owning the stock, otherwise a good portion of our bill of rights is moot. The SEC loves pushing the envelope on what its allowed to regulate and ban under the law, so I would not put it past them trying to file a suit against Keith Gill to establish some novel legal theory giving them authority to regulate honest public statements by market participants. But I really doubt they will file it in an election year or that they'll win.

 

Quote

 

The SEC’s implementing regulation, Rule 10b-5, further defines the scope of the statutory language. The rule renders it unlawful, in connection with the purchase or sale of any security, to:

• Employ any device, scheme, or artifice to defraud;
• Make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made not misleading; or
• Engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

...
Section 10(b) requires a defendant to have made a misstatement or omission. An omission may only give rise to liability if it was necessary to render another statement not misleading, or if the defendant had a duty to disclose

....

A plaintiff pursuing a Section 10(b) claim must demonstrate that the defendant acted with scienter, or the intent to deceive, manipulate or defraud. Although negligent conduct is insufficient to create liability, reckless conduct may satisfy this requirement, and the necessary degree of recklessness varies by Circuit. 

https://www.americanbar.org/groups/business_law/resources/business-law-today/2014-october/section-10-b-litigation-the-current-landscape/#:~:text=Section 10(b) makes it,] may prescribe.” 15 U.S.C.

[Dalal.Holdings]

On 6/4/2024 at 3:43 PM, matthew2129 said:

Read Section 9 and 10 of the 34 Act....

 

https://www.cnbc.com/2020/03/25/bill-ackman-exits-market-hedges-uses-2-billion-he-made-to-buy-more-stocks-including-hilton.html

 

Quote

Bill Ackman warned ‘hell is coming’ because of virus: He then pocketed $2B in bets against markets

 

https://www.reddit.com/r/Superstonk/s/2HDob3opPf

 

CNBC: Manipulation for me, but not for thee.

 

If they go after Keith Gill because of his innocuous posts thus far, there will be a public grassroots rally behind him like these idiots have never seen. Just look at where they left RobinHood after being screwed by the platform. If Etrade is really that stupid, then they should go ahead and ban Keith and find out

 

Edited June 6 by Dalal.Holdings

[ValueArb]

https://www.cnbc.com/2024/06/06/gamestop-shares-jump-30percent-as-roaring-kitty-schedules-youtube-livestream-for-friday.html

 

Poor guy can't even schedule a livestream without the stock popping 40%;)

[whatstheofficerproblem]

He still hasn't sold his $20 June 21st calls. They are now worth $301M vs. $68M when he first bought it. He also has $200M in stock, so his networth is $500M now, and now that he has a livestream scheduled, I'm willing to say he will inch billionaire status by the end of the month.

[Castanza]

Hell of a return starting from 53k 

[dcollon]

Recent post:

 

[aws]

It is bizarre that these meme stock communities have made DFV and Ryan Cohen into almost messianic figures, while both have pumped and dumped and cost their fans boatloads of money.

 

Ryan Cohen bought 10% of BBBY and made it seem like he was going to take an activist role, but then when all his fans jumped in and pumped the stock up from like $5 to $30, Cohen dumped his whole stake in a couple of days and cashed in like $70 million.

 

The GME pump last month probably netted DFV almost $200 million, plus allowed the company to issue $1 billion in new stock. A new crop of bagholders were born while they got richer. Given how terrible the economics of the business are and the massive premium to tangible assets, it's hard to see how this ends without more pain for retail. But it's not like anyone is holding a gun to their head and forcing them to buy. 

[Gregmal]

I think the real nut jobs here are the fools who are again shorting this stuff? Why in the world is there 25% short interest on GME? Just greedy nerds trying to capitalize on the hardships of others. Let em burn.

[wescobrk]

26 minutes ago, Gregmal said:

I think the real nut jobs here are the fools who are again shorting this stuff? Why in the world is there 25% short interest on GME? Just greedy nerds trying to capitalize on the hardships of others. Let em burn.

Andrew Left said he covered his short and put on a new one when it was in the 20’s.

we could see 60 tomorrow .

what the hell is Andrew left thinking?

if he shorted at 60 that is one thing but at 23 or whatever, what a moron!

Edited June 6 by wescobrk

[Gregmal]

Yea I feel like you have to be an idiot to short something that already has 10%+ short interest. On top of having to be a scumbag to short something at all in the first place. No sympathy here.