Gamestop: Power to the Market Players (Part 1)

Aww, look at the lil guy go.
  1. Naked shorting — This is a mostly illegal practice in which an individual or institution first sells shares without locating that they well, actually exist. This is fairly sneaky, but works as long as they can find the shares before the settlement period (delivery date) of the shares actually occurs. If they find it before then, no one is the wiser (except the SEC, when it decides to do anything ever).
That’s a lot of shares.
I can afford some of those!
Blue is SI, versus that cute parabolic ramp representing share price.
  1. Most initial short sellers have abandoned their position at some loss — it’s very likely Melvin did take a loss on their position, but not nearly as catastrophic as some erotica writers on the internet want you to believe.
  2. Others have averaged in over time — very few short sellers don’t want to take advantage of the current hype, and are likely averaging in to capitalize in the inevitable fall.
  3. Most sophisticated short firms have minimal exposure (due to hedging or diversification) — As we can clearly see with Melvin, the GME short position (WSB’s boogeyman) represented at last filing a whopping 0.27% of all assets under management (in actuality almost certainly much less). Firms have defined amounts of risk they’re willing to deal with, and few are losing much sleep over the GME hype beast.
  1. Capping loss with put options — With a put option, you roughly get all the benefit of shorting a stock (minus the premium paid and strike) with a finite amount to lose.
  2. Capping loss with OTM call options — This is my favorite, and one of the more common strategies. When you assemble a short position, you aren’t stupid hopefully — you understand stocks only go up, and infinity is a much farther number from current price than 0 (using a discrete numeraire, of course).
  1. Short interest, at least according to FINRA data, did not seem to decrease in relation to GME’s price increase — this doesn’t logically hold in a short squeeze thesis, given equity-based short sellers are sensitive to the underlying (their risk is uncapped, at least in theory, as the underlying price goes up) (author note: as specified in the Addendum, in the initial stages of the squeeze short interest may go up, as new shorts pile in).
  2. Melvin and large players held short (at last report for the SEC, 9/30, which is a GME-lifetime ago) using put options — these again have capped risk, assuming these positions have not changed over time. In general, long-short firms would not have massive exposure to GME or get blown up, despite what WSB tends to believe.
  3. Put volume, like call volume, has gone up astronomically, leading to more shorted shares by market makers. Unlike the metric Fintel reports (shares available to short) market makers, especially attached to institutional players, are allowed to naked short (and have large amounts of dark liquidity).
Friday’s data, wee.
  1. 13Fs do not list short positions — This is a point I did consider, but decided not to construct an argument using absent evidence (it’s not able to be proven or disproven). That said, as Alex and Kris noted, it’s quite likely that Melvin Capital may have short positions, given 15% down year-to-date according to WSJ.
  2. Short interest can increase in initial stages of a short squeeze — This can be the case because while existing shorts may bail, new shorts may flood in, hoping to speculate on a quick decline. Although as the graph from Ortrex shows, it stayed roughly flat, initial stages of a short squeeze can have increasing short.
  3. Brand names attract new short sellers — It’s quite likely initial shorts have closed or averaged into positions, but new short sellers may likely be attracted due to the famous Citron-WSB war. Those may have been blown out during Friday’s ramp up.
  4. Short lending rate is important — As noted (at least on Fintel) the short lending rate is increasing, and brokers have limited or outright discontinued margin for GME. This is evidence of growing pressure on shorts, but I’d argue this isn’t necessarily indicative that a short squeeze was the driving factor on the stock’s momentum (from this alone).

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