The Gamestop (GME) saga is a compelling one. In short, here’s the story:
A reddit group of retail traders called WallStreetBets has combined their efforts to exploit the market mechanics of options. Namely, this group identifies heavily-shorted stocks and then buys many short-dated calls, which in turn forces option market makers to buy the underlying to hedge their position. The funds that are short those stocks end up getting “squeezed”, meaning they must unwind their positions to satisfy their margin requirements. This creates a parabolic rise in the stock. The winners are the reddit group, as their calls increase in value in multiples. The losers are the short funds and the option market makers.
First, the overall market has had this feedback loop for a long time. Volatility traders and tech stock call buyers are the primary drivers of this bullish market since March 2020. This isn’t new; WallStreetBets just took it to the extreme.
Second, while I have no sympathy for hedge funds, WallStreetBets are not the good guys. The message board is filled with vile, egotistical sociopaths. They are seeking their own gain at others’ expense, and they gloat about that mission.
Further, these traders do not know much about the market mechanics they are taking advantage of. They know enough to be dangerous individually, and collectively they know enough to be dangerous to the whole market. I read many of the posts on their site; they are unequivocally wrong. Many of their ideas that I read about mechanically cannot happen (trying to squeeze the silver market through SLV options). Eventually, these people will be arrested, but for now their collective power must be respected and accounted for.
Since the GME explosion, quite a few stocks have seen rallies from speculation. Some of these buyers do not understand the parameters needed for a WallStreetBets short squeeze. BBBY and AMC were good examples; BB turned out to flop. What you need are liquid options offered weekly on a heavily shorted stock.
If you want to discuss this further, including some candidates for a play, please send me a note. My overall belief is once these stocks make their massive moves like GME, it will be wise to stay out of them. You are likely to lose money... no matter how you play it.