Monday Musings: "Buy the dip, short the VIX, f*ck bitcoin"
GameStop and hyped up redditors, a tale as old as time
I recently finished watching Industry, a British program that debuted on HBO Max over the holidays, that depicts the lives of young power and sex hungry professionals starting their careers in the cutthroat London investment banking scene. This posh ‘Wolf of Wall Street’-esque show was enjoyable overall; head spinning tales of drugs, sex, and the thrill of making money are a familiar yet always reliable narrative.
In a scene from the final episode, it is time for the young candidates to present to the bank’s senior leadership on why they should be hired on full-time. Each associate makes their case. Not largely significant to the overall plot, one of the associates is bet money in return for working in a phrase concocted by older traders into their presentation. When it is time for this associate to present, they walk up to the podium and softly murmer, “Buy the dip, short the VIX, f*ck bitcoin”, and then slyly walk out of the room to the onlookers shock.
The phrase made little impression on me at the time, just seemed like coded financial jargon to me. Honestly my thoughts drifted to posts I’ve seen from high school acquaintances that have taken up the noble job of day traders. No Todd can’t maintain gainful employment, but he, wielding his HP Elite Dragonfly laptop and endless Investopedia tabs can outsmart the market — ok.
While perusing Twitter this morning, I stumbled upon the below tweet, showing GameStop’s stock up 125% for the day — a sharp divergence from both near and long term stock performance. As the tweet claims, the stock’s surprising rise was linked to the r/wallstreetbets subreddit.
Curious, I fired up Reddit and navigated to r/wallstreetbets. Once there, I watched new posts streaming in from members hyping each other up as they watched the stock soar 🚀🚀🚀. Others pleaded to “hold the line” and “stop fucking selling”. The language and terms being thrown around by the rabid anonymous investors reminded me of the phrase in Industry; I was interested, so down the rabbit hole I went.
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
Browsing the posts and comments, it became apparent that there was a trend with the stocks targeted by these fervent incels, I mean redditors. GameStop, Blackberry, Nokia, and other long forgotten companies of millennial nostalgia were the primary stocks that the subreddit of more that 2.2 million members sought to ride into early retirement.
To my amateur eyes, the plan seemed to be this — use the groups large following to buy large positions in these stocks to drive up the price of the stocks. Then as the collective edging came to a climactic end, they would all sell, making huge profits all in a days hard work.
As I watched this unfold, two questions came to mind:
Why did this group target these particular set of stocks?
And more importantly — How are they driving the stock price up this high this quickly??
So lets dive into each…
Now that’s what I call the 2007 stock market!
Both GameStop and Blackberry have suffered precipitous market cap declines since the Great Recession. From a novice’s viewpoint, there hasn’t been a meaningful change in the companies services and offerings over the years to warrant such a rise, but what do I know, let’s see what others were saying.
This Wired article highlights the genesis of this financial version of David vs Goliath. In summary:
Investors had large short positions in GameStop due to the general decline of the stock
Recently, things began to look better for GameStop, which put the short sellers in a risky position, called a short squeeze
Investors on r/wallstreetbets took notice, seeing GameStop as a “meme stock” they could potentially prop up
An activist investor caught wind of the groups plans and challenged the group with a harrowing proclamation — I know more about stonks than you bozos (my liberal paraphrasing)
The issue comes down to a clash of principles. It’s the opinion of most that the stock market is tied to fundamental values (assuming that means revenue, profit, etc). The redditors proposition here is they could flood the market with capital to find gains, rather than having a stance on price valuation
Overall — a cohort of investors saw an opportunity to bet against the elite/industry short sellers in a winner takes all battle to artificially inflate the stock price, and they took it.
But really - how does one do this…
After consulting a few sources, it seems like this aberration wasn’t so mysterious after all. What played out was a playbook case of a short squeeze, as was previously mentioned. But what exactly is a short squeeze? A short squeeze is defined as the following from Investopedia
A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price.
Uhh and what is short selling again?
Since the redditors inflated demand through their coordinated stock buys, the stock price started to rise. Short sellers could no longer cash out, since they would be at a loss due to the stock being at higher price than they originally sold their borrowed shares for. They need to cover their asses, so they also start buying shares to try to offset their short positions, but in return they contributed to the demand of the stock.
So just how short were investors? On today’s Mad Money, Jim Cramer noted investors had shorted over 148% of the stock had been sold short — seems like a lot!
It seems investors with large short positions open themselves up to targeting by groups such as r/wallstreetbets. And boy did the redditors make out big time. While I am sure there is varying levels of veracity to these posts, numerous redditors posted positions worth hundreds of thousands, and in a few cases over one million dollars. Some showed over $100K in single day gains. I guess if you can tolerate the risk there is reward to be found.
This seems like a market duel merely for the case of dueling. Like adolescent friends fighting in their parents basements because there is nothing on TV and they drank too many energy drinks. Yes you could argue the value of challenging high stock prices through shorting (and vice versa) is part of a healthy market, but this doesn’t seem like and efficient market in action. Ultimately, there were big winners and big losers, the market will eventually recalibrate and we will all move on bigger issues like vaccinations or Chet Hanks Jamaican accent — seriously guys why does he keep doing it :( — but this was an eye opening example of the malleability of the market all in search of the worlds most priceless currency — a meme.