GME short ladder attack 1/25/2021

GME EndGame part 3: A new opponent enters the ring
DD
Wow - what a week. This is an extension of my DD series on GME. If you haven’t read them and have time, they will provide some background on my previous predictions, some of which have already come true.

Previous Important Posts
EndGame Part 1 (DTC Infinity) covered the short positions, the float, and potential snowball impacts of increasing prices, and argued that part of the reason that shorts haven’t closed was that it was pretty much impossible for shorts to close

EndGame Part 2 covered Cohen, fair market cap analysis, and potential investors, in which I talked about the amazing mid-to-long term potential for GME.

After the Citron tweet, I shared this fan fiction on what looked like blatant market manipulation by shorts on the day of the tweet, and offered some education on strengthening your position. This one got buried and is worth reading.

What’s happened thus far
Why did GME go up on Friday?
The story here is more complex than paid media articles would like you to believe. GME has been driven up by 3 different forces:

Organic buying

There is a mixture of growing positive sentiment in the investor world (not just WSB) about GME’s future

There’s been a lot of good due diligence shared not just on WSB but even outside (for example, see gmedd.com)

The Citron Backfire

Shorts were on the ropes and kept looking for hail mary’s. They went to Citron and coordinated a dump to try to bring the price down.

However, this backfired. Citron is so disliked in the industry that new wealth poured into GME in the face of Andrew Left’s pleas. Even when Benzinga brought Andrew Left on air, minutes after he left they bought shares live on their show.

The next day, our very on u/Uberkikz11 was on Benzinga and more shares were bought.

Larger investors piling in

In my EndGame Part 2, I hypothesized that we’d soon see larger investors pile in. Then, on WSB, we saw posts from a venture capitalist as well as a hedge fund investor

Gamma squeeze

Once the organic buying started, we rolled into a gamma squeeze. Many people written about the gamma squeeze so I won’t repeat, see this post for an example.

Ultra low liquidity - In EndGame part 1, I talked about how the actual actively traded shares are much lower than the reported float, and share availability has been reducing driven by lots of diamond hands, not just among smaller guys like us but the larger folks too.

I believe there were some short covers on Friday, but Ortex was still estimating 71M shares short at the eod.

However, not many people have talked about why it went down

Why did GME come down?
Here’s where things got interesting for me, and something I think happened again today (Monday) when GME climbed up over 100% but then had a rapid reversal, closing 20% above yesterday but closing below open.

So Friday looked like a slam dunk - gamma squeeze, no shorts available to short, puts were getting exceedingly expensive as a short tactic. What happened?

This is my fan fiction, based on what I saw.

I believe market-makers took a non-neutral stance and began actively shorting the stock after the second halt.

Market-makers are responsible for maintaining liquidity and functioning in the stock market, but they also have abilities that others don’t - for example they are legally allowed to naked short for “liquidity purposes”. They also have the ability to halt trading.

There were two halts in the day on Friday: First, when GME was up 69% (heh heh), and then a few minutes later when it kept climbing after the first halt was relaxed. Note that at the time of the first halt, the bid-ask spread was $10 on the underlying a huge signal that there just were not enough shares to buy.

However, after the second halt, something strange happened. Whereas a few minutes prior, there were no sellers willing to sell their shares below $75, within 15 minutes after the halt there were sellers at 70, 65, 60, and 56. Where did these sellers come from?

r/wallstreetbets - GME EndGame part 3: A new opponent enters the ring
Incredible momentum reversal on Friday 1/22 to push the price not too far above the 60c strike price.

My speculation? This was a coordinated naked short ladder attack. In this type of attack, short seller A sells to short seller B, who then turns around to short seller A at a lower price, etc. and with a very small amount of capital you can wreck the momentum of a stock and make people think that others are running for the exits.

Notice how the stock dropped from a high of $75 on Friday to below 60 - the highest expiring SP for the 1/22 options, and stayed tight in range for the rest of the day. Now, for compliance reasons, MM are required to be neutral by EOD, so 20 minutes before close, MMs had to buy back all their short positions, which led to the strong close above 60.

All this led me to believe that the real fair market price for GME was above $65. Without the market makers interference, GME would have closed higher.

A repeat on Monday
The short ladder attack repeated on Monday.

GME opened strong above $90, and quickly climbed to a high above $155 before it was halted, immediately after the halt, a short ladder attack again drove the price down

r/wallstreetbets - GME EndGame part 3: A new opponent enters the ring
Dejavu - Incredible Momentum Reversal after trading halts.

Both days, there were rapid and significant reversals in momentum.

Now, I kept wondering - why would MM’s take the side of the shorts? What’s in it for them? One theory was that they were not adequately hedged, with the low liquidity of the stock meaning that the price was moving up too fast for them to acquire the shares they needed to.

But then the news hit today:

A new opponent enters the ring:

r/wallstreetbets - GME EndGame part 3: A new opponent enters the ring
That’s right, the same Citadel listed by the NYSE as one of their designated market makers is now invested in Melvin’s hedge fund and has a financial interest in the direction of GME’s share price.

Hey media - you want a manipulation story? You’re missing the big one.

Now what?
Shorts have pulled new dirty tactics each time they’ve been pushed to the edge. Paid media attacks, Citron’s fluff tweet + coordinated shorting, and now they’ve got the actual people who get all the order flow on their side.

On the other hand, GME is still up over 20% and now trading at $88.00 after hours, which is well above the previous day’s high.

r/wallstreetbets - GME EndGame part 3: A new opponent enters the ring
What this tells me is that GME’s true price is still being suppressed. They are using every tactic possible, even changing the bid-ask spread rules on options to specifically target retail’s buying of options.

We’re now playing the game against the folks who write the rules of the game.

Some shorts may have covered today - with prices below $60 at one point they had some great opportunities to. However, there is no way all of the shorts who need to exit covered today.

The short position still lost 20% from yesterday. They’ve got more fingers in the dam, but it’s definitely cracking. Also, every call option purchased prior to 1/25 is ITM and profitable, while every put option purchased prior to 1/25 is OTM.

And, for some reason, the SEC still doesn’t want to enforce the threshold securities list for GME, where it’s now been on for more than 30 days in a highly covered “short squeeze”.

r/wallstreetbets - GME EndGame part 3: A new opponent enters the ring
Margin impacts:
Note that at this point, most brokers have increased margin on GME. This means that people that are long or short on margin will need to put up capital to hold their positions.

This also means puts will get more expensive as people who sell puts will have to maintain 100% of the notional in their accounts to secure the put, so MMs will have fewer retail sellers of puts to absorb the demand.

That means it’s not a bad idea to sell puts to acquire shares if you’re aiming for the long-term and not the squeeze, but keep in mind you’ll need the exact same capital as if you’d bought the shares, so it’s up to you on this.

For shorts, a margin increase while the price is moving against you (even with retracements) is no good.

My speculation
Cohen and the GME board have been strangely silent this entire run. It’s possible they can’t say anything at all during the pre-earnings quiet period, but I’m sure they can see what’s happening.

MMs will continue to play dirty, but at the same time they will need to continue to need to buy GME shares to delta hedge 1/29 and later ITM options as we get closer to expiry.

Things to be careful about
As you can see, this is no easy win. I've been in GME for a few months but I've seen almost every trick in the book. In addition to the suggestions I wrote about in this post, here’s some things to be careful about.

Be careful about swapping ITM calls for OTM calls: it can be tempting to trade-up your options for higher return, but be mindful of the delta impact. You may actually be driving the sale of shares by MMs when you don’t mean to. For example, if you sell a .5 delta call for 2 .2 delta calls, that’s net reduction of 10 shares that MMs have to hold long as leverage.

Be careful about being short any calls this week: Not only do you limit your upside (which is dumb in the prospect of a squeeze), you could end up in a nightmare scenario. A call that ends OTM on Friday could end up ITM after hours if you didn’t sell it, and you may get assigned while the underlying continues to go up.

There are a few other dirty tactics shorts can play. I’m not specifically going to share them here because I don’t want to give the ideas circulation, but

Choose your own limit sells based on personal sell points. Don’t copy others and don’t try to be memey. Make your own decisions.

Stop sharing your positions publicly. I know this is anti-wsb, and I think sharing them is great for this community, but in the case of GME it’s an attack vector for you.

Be careful of holding weeklies until expiration. Remember the multiple trading halts? What if trading gets halted on Friday at 2pm and doesn’t resume for the rest of the day? All your 1/29 calls would expire worthless. Depending on your broker and your cash positions, maybe even your ITM ones. Roll (or sell, if you’re taking profits) your weeklies well before expiration.

Be careful about buying on margin. Brokers are rapidly increasing margins. If you bought on margin with 2:1 leverage, and the stock went up 100%, you’d be in margin call even without a margin change. If the broker moves margin against you, you’ll get to margin call faster.

Don’t bet more than you can afford to lose. I’ve been in GME long enough to know that just when you think going up is a sure thing (remember last Monday with the short sale restriction?), you can be surprised by a new trick. If you bet it all on weeklies all at once, you may not be able to recover from being wrong on the timing. Consider longer expiry or spreading your purchases out. I’ve held through multiple 30-40% drawdowns in the underlying; and held through a 50% drawdown today, so you need to be ready for the volatility.

Watch out for stop loss hunts. It’s common practice for shorts to hunt for stop losses for cheap shares. If you’ve set a stop loss, be really sure about it.

This is not financial advice; do your own DD. I’m holding over $1M in shares and calls.