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The troll from Wall Street: This is how Reddit and options trading caused the Gamestop rally - Walla! Business

2021-01-28T13:01:32.012Z


The video game company has become a favorite among online traders who wanted to make money from buying options. The Wall Street Journal answers the open-ended questions


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The troll from Wall Street: This is how Reddit and options trading caused the Gamestop rally

The video game company has become a favorite among online traders who wanted to make money from buying options.

The Wall Street Journal answers the open-ended questions

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Wall Street Journal

Thursday, January 28, 2021, 1:35 p.m.

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Shares of a handful of companies such as Gamestop and Blackberry have shown gains in triple-digit rates in recent weeks, and have become part of a phenomenon that individual investors are behind.

This is what is important to know about the subject.

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Why did GameStop go up?

Gamestop stock has more than doubled since the beginning of the year, while the S&P 500 rose 2.5%.

This is because the computer game retailer Graffin, Texas has become a favorite of Internet merchants who invest in acclaimed companies in the WallStreetBets forum (Wall Street Betting) on ​​the Reddit site.



These investors focus on short sellers who gamble that stocks will fall because of what they see as the company’s business challenges.

The Goldman Sachs' basket of the 50 stocks that aroused the most short-term interest (meaning Wall Street is betting they were down roughly) rose 25 percent a year, until Friday.

Rising stock prices with significant shorts like GameStop have caused huge losses to hedge funds betting against them, which has even led to a $ 2.75 billion emergency deal to save one such company.



Gamestop shares began to climb on January 11, after the company announced it had agreed to add three directors to its board of directors.

The increases continued in the following days.

In part, earnings have reflected popularity in recent months of momentum trading, meaning investing in companies whose stock prices are rising in anticipation of continuing to rise, and the rise over the past year in options trading, allowing users to make big bets on a small initial investment.

What is the role of options in this story?

Options are contracts that allow investors to buy or sell shares at a fixed price, on or until a certain predetermined date.

They have become especially popular with small investors in recent years, as stock exchanges have made trading in them cheaper and simpler.

The volume of options trading set a record last year, averaging just under 30 million contracts a day.

This year, that number has already crossed the 40 million mark, according to Options Clearing Corp - an increase of more than a third.



Options are especially popular with WallStreetBets users, who have become a hotbed of day traders exchanging ideas and buying hot stocks in bulk.

How did the Gamestop traders use the options?

The options come in two flavors: one is a put option, which gives the right to buy shares under certain conditions, and the other is a put option, which gives the right to sell them.

Voice options are especially popular with readers reading WallStreetBets because buying them is a cheap way to bet that a stock will go up.



Take market behavior on Tuesday as an example.

Gamestop finished with $ 147.98 per share.

At the time, stock options that allowed investors to buy shares at $ 200 a share were trading at $ 19 a share - a fraction of the price of an actual stock.

Whoever bought such an option when GameStop was on the rise, its option price soared, and it could be sold for a quick profit.

Even those who held the actual shares of GameStop made a profit, but probably did not see large returns as with voice options.



On the other hand, using options can help reduce risk for investors.

For example, a person who bought a gamestop stock can protect the investment portfolio by buying put options that allow the gamestop stock to be sold at $ 100 per share (for example).

Thus, if gamestop shares fall below $ 100, you can activate the put option and balance the losses from the shares themselves.

Why do stocks skyrocket if activity is in options?

When purchasing a voice option, someone else has to sell it.

Typically, this would be a market-making company - an e-commerce company that sells and buys stocks, options and other assets during the day, such as Citadel Securities or Susquehanna International Group.



Market-making companies do not tend to make long-term bets on company stock prices.

So when such a company sells a gamestop call option, it usually hedges the risk in another trade.

Often, she will buy shares of GameStop.



In the jargon of options, this is called Delta trading, which is why a massive buy of sound options can push up the price of the stock that is below it.

Beyond that, when the share price approaches the level where sound options can be exercised - $ 200 in the example of GameStop above - market makers may increase buying stocks in order to maintain a neutral position.



The volume of gaming on OptionsStop has skyrocketed in the past two weeks, according to data company Trade Alert.

For most of last week, more sound options were traded than put options, a sign that investors were more bearish lines about the stock in general.

Two executives at options-making companies are trading that Delta trading has played a role in recent gains in hot stocks like GameStop.



In extreme cases, this can become a self-reinforcing mechanism, with two-day traders buying more voice options and pushing market makers to buy shares, raising the share price and encouraging more traders to join in the celebration.

"It can have a life of its own," said Steve Sosnik, chief strategist at Interactive Brokers.

What do the experts say?

The scale and pace of the rise of GameStop, Blackberry and other stocks this year have surprised Wall Street, and no one knows how long the profits will last or which companies will be captured to madness in the future.



But industry veterans have warned that stock gains based on the purchase of speculative voice options by small investors will eventually crash, for several reasons. Among them: Many of these companies were under economic pressure even before the soaring stock price significantly raised their valuations. Valuations and fundamental factors tend to be closely linked over time, analysts say, and overestimations are a good indication that a stock may crash at once.



Investors who purchase the sound options early in the rally and then go out before it ends will benefit and may benefit nicely. Many have already profited, according to Reddit posts. One user claimed to have made more than $ 11 million trading in GameStop voice options.



But a later purchase in the jump, once prices have gone up, is an extraordinary risk, traders say. Many buyers will hold expensive voice options that will lose value quickly and may end their lives with no value at all. Meanwhile the soaring stocks are expected to bring investors with deep pockets back to the cauldron to gamble against them. As the day-to-day crowd of traders moves on to other stocks, the jump in three-digit earnings will explode, warn traders and portfolio managers.



"Finally, a stronger bully comes into the picture," said Stino Milito, co-CEO of Dash Financial Technologies, an options trading company. "The big guys come in and say, 'This is ridiculous. It can not go on like this. "

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Source: walla

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