Gamestop Craziness

by JDH on June 12, 2021

With crypto and gold stuck in a range, and with the DOW not having made a new high since the beginning of May, today’s discussion topic: is the action in Gamestop (GME) the sign of a top?

If the government stops printing money the markets will crash (stock market, housing market, lumber market, cryptos, etc.), but whether or not Gamestop is a harbinger of that action is another story entirely.

For those who have not followed the story, Gamestop is a collection of bricks and mortar retail gaming stores, where teenagers and young people can go and buy a video game.  At the start of the year GME was trading around $17, because everything is on-line, and no-one goes to a store to buy a physical video game.  The hedge funds knew this, so they have aggressively shorted the stock, on the assumption that they will get a big payout when the company inevitably goes bankrupt.

But that’s not how the story has unfolded.

The “apes” on Reddit (a term of endearment for young daytraders) decided to mount a short squeeze, and they drove the price up to $483 on January 28, 2021, a 2700% increase in a month.  Not bad.  By February 19 GME was back to $38, and it appeared that the shorts had won, and the squeeze was over.

Except it wasn’t.

By March 10 GME was back to $345, and it dipped around and hi $345 again on June 8.  It closed the week at $233, so volatility is the watch-word, but it has been fun to watch.

To state the obvious point: I do not consider GME to be an “investment”, and I am not betting the family farm on it.  By next Tuesday GME could easily be $38 again.  Or $500.  I don’t know.

It is however interesting to observe the growing public realization that the markets are rigged, and the Big Boyz can “naked short”, selling shares they don’t own to kill a company, and there are no repercussions.

I hope the GME boys win this battle, because naked shorting is not good, but we shall see.

And if you really want to play this, here’s how I would do it, if I had money I wanted to gamble:

Buy some shares on a down day (like Friday).  Wait two days until an up day, and then either sell your shares, or do a covered write on them.  The premiums are crazy.

I suspect that on Monday you will be able to sell a call option, expiry four days later on Friday, or an option $40 out of the money, for something like $30.  That’s crazy.  With those kind of premiums, you want to be a seller of options, not a buyer.

Unless the stock crashes and you get wiped out, in which case it was a stupid strategy.

Govern yourselves accordingly.  See you next week.