GameStop stock price soars again

Apparently the fat lady hasn't sung yet. 😊

Yahoo/Bloomberg: ‘Reddit Raider’ Favorite GameStop Soars on Latest Cohen Push

"GameStop Corp. mania was reignited Monday after the video-game retailer tapped Chewy Inc. founder and activist investor Ryan Cohen to helm its e-commerce business shift."

Of course, there are contrary opinions about what that news portends for the stock price. 

After the two spikes in January, the price of GameStop stock stayed in a range of about $40-$60 during most of February. Since then the price has more than tripled ($194.50 at yesterday’s close) and today’s pre-market points even higher ($227 at 9:05 a.m.). See the graph here and click on YTD for Jan. 1 - Mar. 9.

GameStop again

The Gamestop bubble is an age-old financial craze with a modern twist

It is much like the speculative tulip bulb mania of 1636, also made more manic by options.

GameStop's Reddit Raiders: Goliath Beaten by David, Then They Change the Rules

It is not true that all the Davids were speculating on the rise of GameStop's stock price and all the Goliaths were short-selling. There were both Davids and Goliaths on both sides. Parts of some Goliaths like Fidelity and BlackRock enjoyed the upward ride. Link.

The author Ron Hart asks how is it legal that more than 100% of GameStop stock is being sold short. Assuming he believes it shouldn't be legal, I agree. A person can't lend what he or she doesn't have. However, suppose a friend and I place a pure side bet on the price of a given stock now at $50. If it rises to $P my friend pays me M*(P-$50) and if it falls to $P I pay my friend M*(P-$50), M being a chosen multiple. Neither of us owns or has borrowed any shares of said stock. Either of us can stop the bet at any time. Our bet should not affect the actual market price $P, no more than my friend and I betting on the outcome of a Super Bowl game or the World Series.

With options (futures, too, if available for GameStop) on said stock that are cash settled we could actually transact with neither of us owning or borrowing shares, and make a similar bet. (If settlement must be in shares, e.g. the buyer of an exercised call option must receive shares, then there is a tie to the actual share market.) One of us is in effect betting on $P to rise and the other $P to fall. One of us is in effect going "long" and the other "short." 

Because option trades can be made in this way, it makes sense for Hart to say that more than 100% of GameStop stock is being (in effect) sold short. A strict legal limit on shorting -- the short side must actually borrow shares owned by somebody else, and the owner can't lend any more shares than he or she owns -- makes sense. The other way of "shorting" via options is somewhat a conundrum and a workaround strict short-selling.

A moralistic crusader such as Liz Warren likely smells a rat here and is eager for government intervention whenever she believes there is something wrong. Of course, any laws or regulations she would likely dream up as a "fix" would likely make matters worse.

Hart writes, "They stopped buy orders in GameStop, allowing the price to drop and bailing hedge funds out -- to the detriment of the Reddit Raiders." (For some, not all.) It was not necessarily a detriment. If a client is prevented from buying high followed by the price plummeting, that is beneficial to the client.) Hart did not outright say they -- I assume he meant Robinhood, the place where most Reddit Raiders do most their trading -- were wrong to do so or why. However, there are plausible reasons why Robinhood did what they did other than assisting the short sellers (mainly hedge funds), but that was the only plausible reason Hart gave. Perhaps Robinhood didn't have the lending capacity to support some transactions. Indeed, Robinhood's CEO denied any collusion with hedge funds. He said the limits were necessary "to meet the clearinghouse deposit requirements that we pay to support customers trading on our platform."

Michael Burry, who made lots of money in 2008-9 on credit default swaps, sold GameStop before its surge.

Elizabeth Warren on GameStop

Sen. Elizabeth Warren asks Robinhood to explain GameStop trade restrictions  

Warren's key points from the article:

- Sen. Elizabeth Warren asked stock-trading company Robinhood in a letter to explain why it restricted trading in red-hot shares of GameStop after hedge funds suffered huge losses in a short squeeze.

- Warren noted that Robinhood last week abruptly changed trading rules for individual investors in certain stocks on its no-fee platform, while hedge funds and Wall Street institutional investors were allowed to keep trading in GameStop and the other companies.

- The letter asks Robinhood to disclose what led it to impose tight trading restrictions on GameStop and other stocks, and whether its hedge-fund investors or other financial services partners who had big stakes in such trading affected the app company's decision.

Also in the article is this: 

GameStop share prices fell Tuesday [Feb 2], sliding 51% to about $110 per share as of midday.

That sharp tumble follows a more than 30% drop during the regular market session Monday [Feb 1].

GameStop's stock price closed at $325 per share on Friday [Jan 29].

If GameStop closes at current levels, it would bring its two-day loss to roughly 66%. 

That's correct. (1-0.51)*(1-0.3)-1 = -0.657 or -66%. That was like the article says midday. The closing price was -72%.

Here is Warren's letter to Robinhood CEO Vladimir Tenev. While it was written on Feb, 2, the content of the letter says nothing about the two-day 66% loss. Her only mention of prices is: "In recent weeks, share prices for GameStop and other companies have undergone sharp changes in value." This sentence is footnoted by a Wall Street Journal article dated Jan. 26, which was before the two-day 66% drop in price.

Well, now that the price of GameStop stock plummeted and after hedge fund gains, is Loopy Liz going to write another letter to Robinhood asking the opposite sort of questions?:

- Why didn't Robinhood protect its "little guys" clients or customers against that 66% price drop?

- Why did Robinhood allow its "little guys" clients or customers to get snared into the speculative bubble in the first place? 

- Why didn't Robinhood foresee the bubble and its bursting?

A very plausible answer to the last question is that after seeing the bubble developing Robinhood did  act to protect its clients or customers by putting in place the trading restrictions that it did! The very ones that Loopy Liz assumes were wrong-headed in her letter! 

To a moral crusader like Loopy Liz a cherry-picked business such as Robinhood, it's "dammed if you do and damned if you don't" (link).