What is behind the 1,600% surge in GameStop ($GME) & who is next? (Short + Gamma Squeeze Explained)

OK, very good afternoon. I've just been joined here by Eddie Dongmez, our head of AmplifyMe. Hey, Eddie, how's it going?

Hey, how's it going, Anthony?

Good, good. I've got this one subject. Obviously, people know me as kind of the macro man, but there's this continuous subject that's dominating the headlines at the moment, and it's about GameStop and this battle that's going on with the short sellers and the retail mob, so to speak. So can you just get us up to speed? What is actually going on with this stock at the moment?

Yeah, it's, uh, it's an incredible story and it's really fascinating to watch because there's just so many players involved. Um, basically GameStop, uh, is a retail kind of company, uh, kind of really out of favor, has performed really poorly. Financials are not looking too hot, to be perfectly honest, but who cares about fundamentals nowadays? Uh, but basically the big story is it's up about 1,152%, and that's before, uh, as of the close yesterday, and it's up another 70% in pre-market. So it's just gone absolutely bananas, uh, basically. So there's a lot of focus on this. There's so many players, uh, involved, um, but I think the, the main, uh, kind of people that are trading this is this WallStreetBets Reddit community. And basically what's been happening is they've been heavily trading out-of-the-money call options. So a call option is the option to buy a security but not the obligation, right? So they have an option to exercise, okay? Um, and basically they've been also buying the stock and betting on this huge rally. Uh, so this company has completely detached from the fundamentals, uh, but essentially the traders and the Reddit communities and the WallStreetBets communities, they've pointed towards catalysts such as, for example, the ex-management of a very successful company called Chewy uh, and their finance team and some senior management sitting on the board of that, uh, and a transition more to like e-commerce, which is obviously a really hot topic at the moment. So there are some fundamental catalysts behind this, but it has got a bit out of whack.

So what's the battle then? Who's on the other side of that trade? Who's getting the squeeze at the minute?

Yeah, so basically this is referring to a short squeeze. So this is basically where people are betting on the price of an asset going down. Essentially to buy it back at a lower price, and that's how they profit essentially. Um, so they have short positions in, in GameStop, uh, and they're having to rush to cover these positions basically after the rally. So they're short, they're betting on the price of it going down, it's going through the roof, so they're rushing to cover these short positions essentially, um, and they have to buy the stock to close that position so they're net neutral, uh, and really short selling is super dangerous without the proper risk management techniques. Because essentially, when you're long something, the, the minimum value it can take is zero, basically, right? So at least your losses are capped there. But if you're short something, the price can effectively, in theory, go to infinity. So your losses without proper risk management are infinite. Okay, so who's on the other side of this? Who's getting burnt on these mammoth moves? Moves. Uh, there's a firm called Melvin Capital, okay? And actually CNBC have just reported that they've closed out of this GameStop position. We've also got Citron Research, which are a short-selling firm, and they publish really great research, and they've been wildly successful, uh, picking their battles. But it seems like they've got on the wrong side of this one. So they're famously short, and they've lost a ton of money. But on the flip side, what makes this really interesting is we've all, we all, we've all seen the film The Big Short, right? So Michael Burry, uh, you know, portrayed, uh, in that movie, he actually had a $17 million position, uh, it's been reported, and that's turned into upwards of $300 million. So he's captured about a 1,500% move. And obviously he was famously, uh, well, he was famous for that big short on the housing market in 2008, uh, but he had this position before this move really, really took, uh, took place. But obviously he's got some massive gains.

So I guess a question here is kind of twofold then. I think it'd be interesting for people is that how long typically does this behavior last? Is there a reference point from previous squeezes like this in the market in a single stock concept? And then who could be next?

Yeah, definitely. So, um, this behavior, uh, is looking extremely frothy, right? And there's pockets of of froth and euphoria in the market similar to 2000 and 1999 and that kind of period. I think there are different macro factors playing into that with yields and interest rates at record lows, which when you're putting a discounted cash flow together, the value— you value it and discount it back to today. When if your denominator is zero, those equity prices can basically go zero, uh, to infinite, sorry, with interest rates at zero. So there are some kind of macro factors, but it is leading to people drawing parallels to that kind of 2000 period. And there's other names with this kind of short interest. Um, so this is Bed Bath Beyond, AMC, SunPower. So what these communities are doing— and let's, let's just make one point— is these are not dumb people, right? This is not dumb retail. These are very sophisticated retail traders that are actioning and targeting small-cap stocks with high short interest and pumping them because they know the shorts are going to have to rush to cover. Uh, and yeah, this is, this is a high level of sophistication that I think people don't really understand.

So sure, surely there's a regulatory snapback to this activity ultimately, you would, you would imagine? Or is it— yeah, I guess the main thing with regulation, it's always slow to be adopted.

Exactly. It's always, uh, a bit like, um, kind of rating agencies. The market prices before regulation can catch up, basically. Um, but it is leading to lots of, uh, calls for regulation, like how can this be happening? You know, there will inevitably, inevitably be a mean reversion, uh, you know, at some point. And there's going to be high, you know, high leverage, uh, positions of retail traders that cannot afford to lose this money. There's going to be people selling calls which are, you know, that probably don't understand what selling a call means and what the risk management involved in that means. So there's going to be a lot of vulnerable, unsophisticated people that are trading on Robinhood, right, uh, are trading on Trading212, CommissionFree, that don't really understand because they've only seen the market go up. So there is a level of danger here that the FCA and the SEC are going to have to look at. With that being said, it's extremely interesting to watch these people kind of what they call is attack the suits, right? And actually get, make a lot of money on the kind of on the contrast of Melvin Capital and these, the rest of the hedge funds that have done incredibly well. So it's kind of like the David versus Goliath story that some people are kind of enjoying.

Which everyone loves. That story, that narrative, right? So if you were gonna summarize this then in 2 or 3 points, just what's happened and things to look out for, what would you say?

Yeah, definitely. So this is a kind of emergence of stay-at-home retail traders, so WallStreetBets, Reddit communities, uh, they're chasing these stocks up, uh, and there's been a huge short squeeze, uh, to the detriment of these hedge funds, uh, so they're getting burnt. These communities are targeting high short interest kind of names. And, you know, for a few days this is looking like it's to continue. And just one point I guess we haven't discussed just yet is that gamma squeeze. And this is another contributor to what's going on right now. So what's a gamma?

Now, now it's sounding complicated for any people who might be relatively new to this. So what is gamma squeeze?

Yeah, exactly. It's one of the Greeks involved in options. And to keep it super, super high level, I want to talk through the process of Okay, when you want to go long an option, essentially there's always on the other— someone on the opposite side of that trade, right? Someone's got to make that market. Okay, so there's the dealers, the, the market makers. So these are your investment banks, uh, you know, quant hedge funds. They're taking the other side of these retail call option trades, right? They're making this market. Okay, so they are then short what we call delta and gamma. Okay, and we can touch upon that in another video. Um, but essentially they need to hedge these positions, right? So if they're short, okay, they're betting on the price of it going down. They do not want to be in this position when their stock rallies 1,500%, okay? So they need to hedge these positions. And how do they do that? They buy the stock, okay? So they're contributing and further exacerbating the moves up in the stock by hedging, okay? And this is kind of similar to what we saw in the summer. I don't know if you remember SoftBank and all those big call option buying there. There was a there was the banks and the market makers hedging these positions, and this is what was leading to those really big and powerful rapid rallies in the big tech names. Um, so this is more of this kind of gamma squeezing and things like that that's further exacerbating the rally, and what, what it's been termed as the tail wagging the dog. So the more the stock goes up, the more these kind of, uh, powers exacerbate it. But that's all I want to say on that.

Yeah, great. I mean, look, really good short insight, and look, feel free to leave a comment on this video. I know that this is probably a subject that divides opinion between the more younger crowd and the probably market traditionalists, if you like. But also as well, there's some of the things that Eddie was mentioning. If you have any questions at all to go into more, just drop a comment. And yeah, remember to subscribe to the channel. Lots more of this to come. And yeah, we're really interested to know from your guys' point of view, Is this a sign, excess froth, of something on the horizon, or is this just the new norm? Be good to get your guys' view. Thanks, Eddie.

Thanks, Ant.

Take care, guys.