The Game Never Stops - Bloomberg

Stop, Game

I don’t know what to tell you. Maybe I’ll tell you three stories.

Here is a fundamental story. There’s a company called GameStop Corp. It sells video games at the mall. It has over 5,000 stores. For various reasons people do not buy a ton of video games at the mall these days. Two of those reasons are: People do not love going to the mall during a deadly pandemic, 1  and people today increasingly buy video games by downloading them directly from online stores. 2  Being a mall retailer of video games is not obviously a great business to be in, and this has been reflected in GameStop’s earnings and stock price. In 2011, GameStop reported net income of $408 million on revenue of $9.5 billion; in the last 12 months, it had a net loss of $275 million on revenue of $5.2 billion. GameStop’s stock traded as high as $62.11 per share in 2007; it got as low as $3.50 in March 2020. It closed at $18.84 on Dec. 31, 2020, for an equity market capitalization of about $1.3 billion.

But some people think GameStop is primed for a turnaround. One of those people is Ryan Cohen, the former chief executive officer of Chewy Inc., the online pet-food retailer. If you can sell pet food online, you can sell video games online. GameStop does sell some video games online, and could probably do more of that and less with the stores in malls. Cohen’s investment vehicle owns about 12.9% of GameStop, which he started buying in August, when the stock was in the mid-single digits. In November he sent a stern letter to GameStop’s board of directors, reminding them of what a bad job they’ve done, asserting “that GameStop has the flexibility to evolve into a technology-driven sector leader,” and urging the board to try to do that. Two weeks ago, on Jan. 11, GameStop announced that Cohen and two of his friends from Chewy would be joining GameStop’s board. “Their substantial e-commerce and technology expertise will help us accelerate our transformation plans and fully capture the significant growth opportunities ahead for GameStop,” said GameStop.

So GameStop, which was bad, is becoming good. It was a money-losing mall retailer in a dying business during a pandemic, and traded like it, but now it will be a dynamic e-commerce leader in the rapidly growing gaming segment, and should trade like it. (Stock prices, of course, reflect the future, not the past.) Since the start of 2021, the stock is up 245%. It closed on Friday at $65.01 (a $4.5 billion market cap), up 51% in a single day. The rapid rise seems to have been fueled by small-time retail investors, who learned about GameStop online, principally on Reddit’s r/wallstreetbets forum, and who have been convinced of its enormous potential. Here is an actual stock analyst:

GameStop became a “cult stock because of Ryan Cohen’s success with Chewy” and retail investors “appear confident that he can implement omnichannel initiatives that will materially grow their earnings,” Wedbush analyst Michael Pachter said in an email.

Of course they might be wrong! There are lots of short sellers who think that GameStop is in fact a dying business, and that its prospects to improve are not great. Some of them, including Andrew Left of Citron Research, are quite vocal about it. They are betting that the current stock price is way too high. That’s how markets work; some people think a stock is good and buy it, some people think it’s bad and sell it, and the market balances supply and demand. Recently people have become much more enthusiastic about the future, and the stock has gone up. 

Here is a technical story. It has two parts. First, a lot of people are short a lot of GameStop stock. (Notoriously, they are short more than GameStop’s entire float; Bloomberg tells me that short interest is 71.2 million shares, while GameStop has only 69.7 million shares outstanding. 3 ) They are short for the fundamental reasons we talked about above: dying mall retailer with huge valuation, etc. When you short a stock, you borrow shares and sell them, promising to return them later. You have to pay a fee to borrow shares, you have to post collateral based on the value of the borrowed shares, and you (generally) have to return the shares you borrowed if the lender asks for them back. When the stock goes up a lot, short sellers start feeling “squeezed”: Their borrow costs go up, they have to post more collateral, and lenders might ask for their stock back. Some short sellers might have to capitulate, and they will close their positions by buying back stock. There is a feedback loop: The stock goes up, short sellers give up, they buy stock to surrender, and their buying pushes the stock up more.

Second, a lot of people (on Reddit) who like GameStop don’t buy stock; they buy call options. If you are a retail trader looking to gamble on a stock, you can buy call options to get leveraged exposure to the stock.  For instance, last Tuesday (Jan. 19), you could have bought a $50-strike call option on 100 shares of GameStop stock expiring this coming Friday (Jan. 29). Bloomberg tells me this option would have cost you about $3.35 per share, or about $335 for a 100-share option contract; the stock closed that day at $39.36. If you sold the options on Friday (Jan. 22), when the stock closed at $65.01, they were worth $18.16 per share. 4  You put in $335 and got back $1,816; you made a 442% return in four days. If you had just bought 100 shares of stock instead, you would have had to put in $3,936 to get back $6,501, a 65% return. Of course if the stock had stayed flat instead of going up to $65.01, you’d have lost 0% by buying shares and 100% by buying the options. So options are great if you have a relatively small amount of money and want to take a lot of risk with it. If, for instance, you are a retail trader on WallStreetBets.

Meanwhile the market maker who sold you the options would have hedged its option exposure by buying about 40 shares of GameStop stock, for about $1,575. (This—the fraction of the underlying shares that the market maker buys to hedge the option—is called “delta.” 5 ) Your $335 of option premium caused $1,575 of stock buying. More important, as the stock goes up, the market maker will adjust its hedge by buying more stock—by the end of the day on Friday, the market maker would have owned about 80 shares. (The change in delta as the stock price changes is called “gamma,” and people who like this sort of technical explanation love talking about “gamma.” 6 ) You haven’t done anything else—you bought the options on Tuesday, and then stopped trading—but the market maker kept buying hundreds of dollars more stock as the stock went up to keep the option hedged. 7  Multiply that by the extreme popularity of GameStop options, and you get a lot of stock being bought as the price goes up—which, of course, pushes the price up more.

The technical story is just that these two factors—a short squeeze and a gamma trap, if you like—combined to push the stock up rapidly on Friday. Something started the ball rolling—the stock went up for some fundamental or emotional or whatever reason—and then the stock going up forced short sellers and options market makers to buy stock, which caused it to go up more, which caused them to buy more, etc.

Here is a YOLO story, a story of utter nihilism. You know this story. This story is perhaps best told with a series of rocket emojis, but let’s try words instead. The people on the WallStreetBets subreddit sometimes all get into a stock at once. This is fun, a nice social outing in an age of social distancing, a risky but potentially lucrative collective entertainment. Recently they decided to do GameStop. Because, I don’t know, they’re gamers, or because it’s a little comical to pump the stock of a chain of mall video-game stores during a pandemic, or because a lot of professional investors are short GameStop and they thought it’d be funny to mess with them. Or, especially, because their friends on Reddit were buying GameStop and they figured they’d join in the fun. Or all of those things in different combinations. Take one person who’s long for fundamental reasons, add 100 people who are long for personal-amusement reasons like “lol gaming” or “let’s mess with the shorts,” and then add thousands more who are long because they see everyone else long, and the stock moves:

“It was a meme stock that really blew up,” said WallStreetBets moderator Bawse1. “The massive short contributed more toward the meme stock.” GameStop seemed so utterly doomed that the current situation was actually sort of funny to the subreddit’s denizens. Banded together, WallStreetBets members bought in big enough to move the stock. …

“The traditional Wall Street view is that markets are driven by some tie to fundamental value,” said Hoffstein. “What we’re seeing is an influx of speculative retail traders who don’t have any philosophy about valuation.” He quotes a phrase from Bloomberg’s Tracy Alloway: “Flows before pros.” The market will be driven by a flow of capital rather than fundamentals. ...

“I think the subreddit brings a new factor into stocks that wasn’t as prevalent as before,” says Bawse1. “It’s called hype.”

Meanwhile, calls of “BUY” alongside emoji rocket ships flooded the WallStreetBets Discord Friday, where over 25,000 onlookers watched chat fill with diamonds, rocket emojis, and obscenities. GameStop’s stock had just hit $60, a great leap from the $20 it was worth just last week. On Friday, 194 million shares were traded, over 12 times its average trading volume. In the Discord’s voice channel, where hundreds participated in the “gme-rocket,” yelling, humming, and intermittent announcements coalesced into something like a Gregorian chant.

Here is a seven-hour YouTube video from Friday in which a guy called “Roaring Kitty” dips a chicken tender in champagne to celebrate his GameStop wins. “This is the thing, overbought can stay overbought, remain overbought, even get more overbought,” he says, which is as good a summary of the situation as anything else.

Obviously there is some truth to all of these stories. We go in for a lot of cheerful nihilism here at Money Stuff, and of course I am inclined, when I read about Redditors pumping up a stock, to think “ah those Redditors, having their silly fun again.” I have written a lot recently about my “boredom markets hypothesis,” the notion that stocks these days are driven not by rational calculations about their expected future cash flows but by the fact that people are bored at home due to the pandemic and have nothing better to do but trade stocks with their buddies on Reddit. Why not trade GameStop, literally a stock about games? And if you look at WallStreetBets, there are of course a lot of rocket emojis and Lord of the Rings memes and screenshots of large numbers in people’s trading accounts.

But to be fair that’s not all there is; there is some discussion of the fundamentals of the company, too. Here for instance is a fundamental bull case for GameStop on Reddit, arguing that the company should be worth $50 billion, or about $700 per share. It’s a self-professed “venture capital perspective on GME,” which means that the thesis is literally “companies are worth 20 times revenues right?” 8  Still that is a sort of fundamental valuation. Here is another “DD”—“due diligence,” the WallStreetBets term for, like, an investment memo—discussing the business, albeit using more slurs and obscenities than is customary in equity research. I do not mention these to suggest that they’re right (or wrong), but just to point out that the GameStop … phenomenon … did not come from absolutely nowhere. There was at least a speck of fundamental dust for a cloud of meme-stock enthusiasm to form around.

On the other hand if your story of GameStop is just, or even mostly, “well the present value of its expected cash flows more than tripled this year, and was up 51% on Friday,” then I do think you are missing something essential. What happened on Friday? 

The technical story is also surely true, at least in part, but I also think that it is a little overstated. For one thing, the actual institutional short sellers do not seem to be particularly squeezed. Their shorts are a small portion of their capital, there still seems to be plenty of borrow available, short interest does not really seem to be declining, etc. But, sure, someone probably threw in the towel when the stock went up, why not. There does seem to have been a huge amount of options trading on Friday, and there are suggestive signs that delta hedging of those options had a significant effect on the stock. 9  

Mostly though I think that this story is overstated because it doesn’t really explain anything. “The stock went up because a lot of people bought calls, and calls are magic”: Well, they’re a little magic—they’re a leveraged way to bet on stocks—but you need a lot of people buying a lot of calls for that to work. Why did so many people all of a sudden want to risk a lot of money on GameStop calls? 

I keep coming back to the nihilism thesis. We talked recently about how the stock of a micro-cap company called Signal Advance Inc., which shot up 5,100% after Elon Musk tweeted something about an unrelated app named Signal. The error, as it were, was quickly corrected: Lots of news stories, and a tweet from the “real” Signal, clarified that Musk was not talking about Signal Advance. The stock kept going up. (It’s still trading at roughly 10 times its pre-tweet price, weeks later.) Perhaps the buyers were impenetrably ignorant, but I suggested another possibility: There is a mass of retail buyers who like to all buy the same stock, and Musk’s tweet gave them a Schelling point to coordinate around. They weren’t confused about what Musk meant; they didn’t care that much about what Musk meant. They just like to all have fun together, pumping some stocks. You don’t actually need a Schelling point to coordinate around. You can just go on Reddit and talk about what stock you’re all going to buy.

When I wrote about Signal, I got a few thoughtful emails from readers about Bitcoin. Bitcoin is a financial asset with no cash flows. It has value purely because people think it’s valuable. Bitcoin is worth $34,000 because other people will pay you $34,000 for it, and they’ll pay you $34,000 because other people will pay them $34,000, etc. There is no underlying claim; there is just a widespread acknowledgment that people think it’s valuable.

I do not say this to be negative about Bitcoin. This is fascinating! It is an amazing collective accomplishment to create a new thing, from scratch, that is valuable just because we collectively agree that it’s valuable. It is amazing to find a way to create that collective agreement from nowhere. Once you have it, you can actually do useful things with Bitcoin—as a store of value, a currency, whatever—that you couldn’t do before. Bitcoin created real financial value out of, essentially, the human imagination.

That’s cool but it’s also a terrifying proof of concept. If pure collective will can create a valuable financial asset, without any reference to cash flows or fundamentals, then all you need is a collective and some will. Just hop on Reddit and create value out of nothing. If it works for Bitcoin, why not … anything? Why not Dogecoin? Why not Signal Advance? Tesla Inc.? GameStop? 

Anyway as of about 11:15 a.m. today GameStop’s stock had gotten as high as $159.18, fell back to $88.09, and had been halted four times for excessive volatility. 

One more thing

One good rule of thumb for companies that, say, run video-game stores in malls during a pandemic, is that if a bunch of traders on Reddit decide to buy the heck out of your stock one day for somewhat inscrutable reasons, you should sell it to them. One hundred ninety-seven million shares of GameStop stock traded on Friday, worth more than $10 billion. Somebody had to sell all those shares. Why not GameStop? It has an unlimited supply of GameStop stock. Why not pop into the market and do, say, 1% of the day’s selling? Sell one or two million shares, collect $100 million from enthusiastic Redditors at the stock’s all-time high? Surely it could find something to do with the money. 10

The advantages of doing this, for GameStop, are: 

1. You have more money to spend on doing stuff.
2. The enthusiastic Redditors want this: They are buying the stock as a bet that you will survive and thrive and crush the short sellers and pivot and implement omnichannel initiatives; if you need money to do those initiatives, they would be honored to give it to you.
3. You have sold stock at the all-time high stock price, so while you have diluted your existing shareholders a bit, you have done so as gently as possible.

There are disadvantages. One small one is: Your stock is on a wild ride, so you could easily mess this up as a tactical timing matter. You could have decided on, say, Jan. 13, as your stock went up 57% in one day, to sell a bunch of stock. GameStop closed at $31.40 that day. It closed at $65.01 this past Friday, a week and a half later. If you sold a bunch of stock at $31.40, you’d feel fine, really, but you’d have missed an even better opportunity. Today, so far, is even better.

A bigger disadvantage is: If you do time this perfectly, and sell a bunch of stock at the absolute peak on the back of somewhat inexplicable Reddit demand, and then the Redditors get bored and the stock falls back to, say, where it was three weeks ago (the high teens), then the people who bought the stock from you will have complaints. They bought stock high, from you, and immediately lost their shirts. Their complaints will have the basic form: Look, you have fiduciary duties to your shareholders; you are supposed to deal honestly with us. You sold us stock that you knew was ridiculously overvalued. Yes right sure we happily bought it, yes right sure we also knew it was ridiculously overvalued—this is not a secret!—but, you know, still. It’s a bit rude.

These complaints are not fundamentally about “securities fraud,” but one could express them that way. (“The risk factors in the prospectus did not adequately warn about the risk that your omnichannel initiatives wouldn’t work, or the risk that Redditors would stop frantically buying call options,” etc.) You might get sued. You might not; again, I think there is no real fraud here. (Not legal advice!) But it would leave sort of a bad taste in everyone’s mouth.

We have talked about this sort of thing a few times. Most notably, last June, Hertz Global Holdings Inc.’s stock was soaring on weird retail demand, so Hertz decided to sell some stock into that demand. Hertz was actually in bankruptcy, so it asked a bankruptcy court for permission to do this. The bankruptcy court was like “uh sure I guess, that’s weird, but good for creditors.” Hertz went and did it. The Securities and Exchange Commission quickly shut it down (though Hertz was quicker, and sold $29 million of stock before the SEC stepped in). The SEC didn’t give a reason, but presumably its reasoning was along the lines I laid out above; not quite fraud but fraud-ish. “Fraud in plain sight,” someone called it. 

But we also talked recently about Tesla Inc., which twice last year sold big chunks of stock in at-the-market, or “ATM,” offerings. In an ATM offering—the kind Tesla and Hertz used—you don’t hire banks to call up big investors and place chunks of stock with them at a negotiated price; you just hire banks to sell your stock on the stock exchange in ordinary transactions, whenever you feel like it, at whatever the current price is. “The lesson,” I wrote, “is that if you are looking to tap into exuberant retail sentiment to sell your stock, the ATM offering is the way to do it.” 

Happily, GameStop does have an ATM offering going. It put it in place on Dec. 8, 2020, when the stock was at about $16.35. The way these things work is that GameStop disclosed that its bank could sell stock—up to $100 million worth—“from time to time” at GameStop’s request “consistent with its normal trading and sales practices”; it did not disclose any particular schedule, and has not yet reported if any shares have been sold, or how many, or when. So I don’t know if GameStop had sold the whole $100 million before Friday’s wild run, or if it had any stock left over to sell; if it had any left over, I don’t know if it sold it all on Friday. I hope it did!

The Intel hack

We talked on Friday about how Intel Corp. had to release its quarterly earnings early—roughly 12 minutes early—because someone had hacked into its computer systems and gotten an early look at an infographic containing its main earnings results. But that was perhaps overstating it. Intel, it turns out, was not really hacked. What happened was simpler and dumber. Intel puts its earnings releases up on its own website using predictable file names. Byrne Hobart explains:

Intel had an infographic for their Q3 earnings, in a file that ended with "Q3_2020_Infographic.pdf" and had a URL with a sequential numbering scheme. Q4’s earnings presentation had the same file naming scheme, so it was easy to guess.

It is a weird borderline between “hacking” and just being prepared. Like if you know that Intel is going to release earnings after the close today, you might, at around 3:30 or so, point your browser to Intel’s website. Or you might point your Bloomberg terminal to Intel’s CN page. Or wherever you go to read Intel’s earnings. And if you’ve done this before, and are really into efficiency, you might point your browser, or your algorithm, not to the general Intel news page, but to the “Q4_2020_Infographic.pdf” page, because that’s where the actual results will be, and when they are available, you want to save the half-second of going to the main page and clicking on the link to the results. You know where the results will be, so you just go there, to wait for them to come out. At 4 p.m., or 4:01, or whenever. You figure you’ll get them a half-second before everyone else, as soon as they become public.

But then Intel actually put them up before the close, and if you pointed your browser to the right place, you got them whole minutes before anyone else. Whole minutes before Intel officially made them public, by putting out a press release. On the other hand, you got them exactly when Intel actually made them public, by putting them on its website. If you knew where to look on that website. Well, what does “public” mean, anyway?

I don’t know if this is “hacking,” or “insider trading,” and I don’t care that much, but I will say that it’s related to what we talked about on Friday. What I said was that there are lots of ways for Intel’s earnings release to get to you—Intel’s website, the SEC website, the Bloomberg terminal, or various machine-readable feeds directly to your trading algorithm—and each will arrive at your eyeballs or algorithms at a slightly different time. If you know about or subscribe to or pay for or have the ability to make use of the faster mechanisms (direct feed to your fancy fast algorithm), you will be able to trade on Intel’s news before the people who can only use the slower mechanisms (looking at the Intel website with their eyes and then calling their broker to trade). If Intel puts out news during market hours, which it tries not to, in order to give everyone a fair shot. It turns out, this time, that if you knew about this way of getting Intel’s earnings—by pointing your browser to the right file name—you were way ahead of everyone else.

The O’Hare hedge

I wrote on Friday about “the old trader joke about the ‘O’Hare straddle,’” but I did not know that the term comes from a specific anecdote. From Aaron Brown’s “Financial Risk Management for Dummies”:

A flamboyant and notorious Chicago Mercantile Exchange (CME) pit trader … Darrell Zimmerman, was way over his limit selling S&P 500 put options on Monday, 19 October 1987. His wife, who also worked at the CME, insisted that he hedge the positions.

Instead of reducing his positions, Darrell bought more to double up on his risk. When his wife confronted him and asked him about his hedge, he pulled out two first-class tickets from O’Hare airport in Chicago to Hawaii for a vacation the couple had planned. ‘Here’s my O’Hare hedge,’ he is supposed to have replied, ‘If the market goes back up, we’ll have a great vacation. If it doesn’t, we’ll be in Hawaii where they can’t find us.’

Well, the market didn’t go back up. Both Zimmermans were fired from their jobs. Darrell continued to trade with O’Hare hedges for five more years, before finally losing for good and spending two years in prison for fraud …. Darrell Zimmerman went on to a successful career as a jazz musician and also to be an active participant in Vancouver’s Occupy Wall Street movement, and to run twice (unsuccessfully) for mayor of Vancouver.

I hope those Occupiers knew what a Wall Street legend they had in their midst.

Things happen

New Goldman Sachs exit option: post complaining videos on YouTube. Experienced well-being rises with income, even above $75,000 per year. Ex-MoviePass chairman creates new media company Zash: We're 'disrupting Hollywood again.' ( Earlier.) Geologist Finds Rare Formation Inside Rock That Looks Exactly Like Cookie Monster on Sesame Street. OK Rep. Justin Humphrey proposes Bigfoot hunting season.

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1. GameStop closed a lot of stores in spring 2020, but “by the end of fiscal June 2020, 98% of the Company's stores globally were open to the public following the implementation of the highest level of health and safety protocols recommended by the federal and local health and governmental authorities.” Still, says GameStop, “the negative impact related to the ongoing COVID-19 pandemic continued to affect our store operations in all of our operating segments.”

2. “Technological advances in the delivery and types of video games and PC entertainment hardware and software, as well as changes in consumer behavior related to these new technologies, have and may continue to lower our sales,” GameStop says in the risk factors of its 10-K. “The current consoles from Sony, Nintendo, and Microsoft have facilitated download technology. In addition, Microsoft sells disc-less consoles that are currently available to consumers. Downloading of video game content to the current generation video game systems continues to grow and take an increasing percentage of new video game sales. If consumers' preference for downloading video game content continues to increase or these consoles and other advances in technology continue to expand our customers’ ability to access and download the current format of video games and incremental content for their games through these and other sources, our customers may no longer choose to purchase video games in our stores or reduce their purchases in favor of other forms of game delivery. As a result, our business and results of operations may be negatively impacted.”

3. This does not necessarily mean a lot of people are doing evil illegal nefarious naked shorting! Really, I promise! There is no special limit on shorting at 100% of shares outstanding! Here is an explanation of how options market makers (discussed below) are allowed to short without a locate, but I want to offer an even simpler explanation. There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It's fine.

4. These are last reported trade prices for the options ($3.35, $18.16) and stock ($39.12, $65.01) on those days. Those last option prices are not necessarily “against” those last stock prices; Bloomberg’s OV calculator says the options should have been worth $3.60 and $18.91, respectively, at the ends of those days. Close enough.

5. The market maker has sold you an option that goes up in value as the stock goes up. The more the stock goes up, the more the market maker owes you. It hedges this by buying something else that goes up in value as the stock goes up—specifically, stock. Its option pricing model—the Black-Scholes formula or a related model—tellsit how much stock to buy; that output is a number called “delta” and ordinarily expressed as a percentage. Delta is the sensitivity of the option price to the stock price; the higher the delta, the more the option behaves like stock. The more in-the-money the option—for a call option, the higher the stock price is relative to the strike price—the higher the delta will be. A loose, nontechnical, *incorrect*but still sometimes helpful way to think about delta is as “the probability that an option will end up in the money.” A 100-delta option is so far in the money that it is sure to convert into stock, so it's just stock. A 0-delta option is so far out of the money that it can’t possibly convert into stock, so it’s just worthless. A 50-delta option is roughly at-the-money—a $50-strike call when the stock is trading at $50—and could go either way. The more stock-like an option is, the more stock the market maker will buy to hedge it. Here,Bloomberg’s OV page computes a 37.57% delta for the Jan. 29 $50 call as of last Tuesday; I rounded up for ease of use.

6. As discussed above, the delta of a call goes up as it gets more in-the-money, as the stock price gets higher. So the market maker has to buy more stock to keep the option properly hedged. Gamma is the sensitivity of an option’s delta to the price of the underlying—basically, how much more stock does the market maker need to buy as the stock price increases. Gamma is highest for at-the-money options; it trails off toward zero as the option gets very in- or out-of-the-money. Here is a good overview of the gamma dynamics in GameStop.Bloomberg’s OV page computes a 79.43% delta for the Jan. 29 $50 call as of Friday; again I rounded a bit.

7. Meanwhile other people who were betting *against* GameStop bought put options. Dealers who sold them those options would have sold stock (short) to hedge them. Initially this might keep the price down. But as the stock went up, the dealers would *reduce* their hedge, buying in stock (covering their short positions). This too would have the effect of pushing up the stock—and could look a little like a short squeeze.

8. I am only barely kidding. Here’s a bolded paragraph: “If I was presented a new company that had just driven it’s e-commerce revenues 300%!!!!! YoY, operating in a several hundred billion TAM, backed by investors and management who had grown a company in the same vertical to hundreds of millions in annual subscription revenue, and with a strong balance sheet and distribution footprint and a widely recognized brand, 20x topline revenue in the early stages would be considered a steal to invest at.”GameStop went public in 2002, but I suppose you’re always as early-stage as you feel. (Also GameStop’s revenue for the last 12 months is about $5.2 billion so I dunno.)

9. I’ll refer you again (also in footnote 6) to this post by “Nope, it’s Lily.” One thing she points out is that a lot of options *expiring this past Friday*traded that day, which have particularly severe gamma dynamics. (At the end of the day they are either zero-delta or 100-delta, and if the stock moves rapidly then they move rapidly between those extremes.) Another thing she points out is that the highest strike price of the Friday options was $60, meaning that once the stock got meaningfully above $60 all the short-term options were in-the-money and there was not a lot more gamma pressure. “Once 100 delta is reached, there is no more cycle of increasing spot price causing increasing share buying, only normal share buying.” And that’s arguably why the stock topped out inthe $60s on Friday.

10. Incidentally I sometimes make arguments the other way. Perhaps you could make a case, like, “mall retail of video games is doomed, a company that runs mall retail stores cannot pivot to anything else, and GameStop should return capital to investors and die gracefully rather than wasting a bunch of shareholder money on a doomed pivot.” Without discussing the merits of the particular GameStop case, I think that this *form* of argument is *generally* pretty good: It’s hard for a big old company to do something different, it is hard for incumbents to do the disrupting, it’s hard to let go of legacy stuff (all those stores), etc. This is why I am basically fond of stock buybacks: Companies with no great ideas for what to do with their cash should give it back to shareholders, and companies that *think* they have great ideas for what to do with their cash often don’t and should give it back to shareholders too. (In fact GameStop bought back about $200 million of stock in 2019, though it stopped in 2020.) Still if you are actually the chief executive officer of a video-game mall retailer it can be very hard to say “well this can’t end well,” and much more attractive to say “well if we just had an extra $100 million we could really future-proof our mall retail video-game business.” And then $100 million just falls into your lap.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Brooke Sample at bsample1@bloomberg.net

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https://www.bloomberg.com/opinion/articles/2021-01-25/the-game-never-stops

2021-01-25 17:34:00Z
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