We were cruising along so nicely yesterday afternoon. For the second day in a row, Federal Reserve Chair Jerome Powell rescued a declining market with Congressional testimony that reaffirmed the Fed’s continued commitment to monetary stimulus until or unless we achieve some combination of sustained inflation above 2% and full employment. Since none are immediately likely, many traders took this as a signal that it was relatively safe to invest in equities. Many traders then extrapolate that signal to imply that if it’s a good environment for investors, then it’s also a potentially good environment for speculators. And of course the nexus for speculators is GameStop (GME) and the other so-called “meme stocks”.
Yesterday’s move in GME caught most of the market by surprise. The stock had been moving higher throughout most of the session, but only modestly (at least by the recent standards for GME). Having started the day around $45, it flirted unsuccessfully with $50 at 11:15 before giving back about half its gains in the next 15 minutes. It then clawed back slowly towards $50 once again, finally crossing that threshold for good at about 2:40. At that point there was still no signal about what was about to transpire just a few minutes later.
Last week, I wrote about the market’s fascination with round numbers, so it wouldn’t surprise me if many traders used $50 as a key resistance level. I have no way of knowing for certain how many short sellers were using $50, whether as a stop loss for themselves or a buy signal for aggressive traders. However, it is logical that it would be considered a potential breakout point on a day where we saw widespread speculation. The stock began to trend higher in the few minutes that followed.
I consider this to be the turning point: at 14:58, when the stock had already jumped to $53.47, someone bought 750 contracts of the 50 strike weekly calls that expire tomorrow (2/26/21) for $6.85. In a stock and an options class where small trades are the norm, this one stood out.
Can I assert that this single trade of the equivalent of 75,000 shares was enough to move a stock with a daily volume that averages over 13 million shares? Not with 100% certainty, but big moves usually need a catalyst and I believe this was a catalyst for increased buying in the stock and options. Within 20 minutes the stock was nearly $10 higher.
GME shares then slipped slightly, fading back to the $60 level. Then the second key options trade hit the tape: at 15:27, with the stock at $60.80, 427 of the 60 calls, also expiring tomorrow, traded at $7.75. Note that the stock was just over $7 higher than in the previously noted trade, but these calls, struck $10 higher, traded for almost a dollar more. That meant implied volatility was increasing sharply. GME stock began to zoom shortly thereafter, beginning a meteoric rise that culminated at $91.71 at the market’s close about ½ hour later.
The rise continued into the aftermarket, with the stock eventually touching $200, before trading in the $140-160 range for most of that session. I believe that this was directly related to the speed of the move and the limit up/limit down halts that punctuated it. Options volumes were enormous, with volumes in most near-term strikes at 4-5x the previous open interest. Whoever sold those calls simply did not have enough time to cover their risks in the regular session, and may have felt it prudent to do so after the close. Also, of course, GME was on everyone’s radar, so that brought out another crop of speculators.
As of now, GME seems to have found a trading range in the $120-$140 area, though that could of course be wildly inaccurate when you read this. We also see heavy volume in the stock and options, with implied volatilities in the current week’s options reverting to the 1000 level that we saw around the height of the last rally. Options market makers, burnt before, do not appear to have an appetite for further destruction.
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