As for GME, there’s fundamental analysis and financial experts telling us it is only a matter of time before the price free falls. But there’s a serious behavioral dissymmetry here. The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals. I’m not sure you’re wrong, but I’m personally a little bit less certain that the price will drop — at least soon — due to this reason alone. As this article points out, feedback loops can be extremely powerful. And I suspect they can play out over longer periods than we expect.

Intriguing, and (lamentably) not entirely impossible. But, you know: bubbles do have the habit of bursting.

Yes, that's basically the point we've reached with the stock market as a whole right now. Nothing is tied to any kind of fundamentals. It's all about "we like the stock".

Not really, though. GME and other meme stocks might be out of whack a lot, temporarily, and stocks generally might be overvalued somewhat (and, I’d say, harder to value because rates are so low, making the horizon longer), but I’m pretty sure that the mechanisms are still there that fundamentals will reassert themselves.

I am financially illiterate, but I understand the reddit posts to mean that short squeeze is inevitable because GME is >100% shorted and issuing more shares would kill the short squeeze and drive the price down

A low stock price creates risk because it makes it hard (expensive) to raise capital. Well, here you are, it doesn't get better than this!

Really? I saw a local Software Etc. and Funcoland both get replaced by GameStops. Both times, it was a straight downgrade in terms of customer experience.

A couple billion dollars in the bank buys you a lot of lawyers.

As Matt pointed out, AMC is doing it. I agree with dougmwne, this is the corporate kickstarter opportunity of a lifetime. They should take it.

It's also a negative feedback mechanism in a market full of positive feedback mechanisms (ie, the short squeeze). Creating more stock makes the market more stable.

Now, if many peiple start believing that, it will cause an actual bubble. When interest rates are taken into consideration, the global stock market valuation in terms of average P/E rates is about where you’d expect it to be.

Which is higher than but a few times before, to be sure. But still in the realm of plausible fundamentals.

A share of stock represents a tiny percentage share in a company's assets and profits. For simplicity, let's say a company has 100 shares, and you own 1 share or 1%. If they then issue 100 new shares and sell them on the market to raise cash, your ownership in the company has been diluted from 1% to 0.5%.

That's why company shares will never be safe as an arbitrary store of value like bitcoin is. No one can arbitrarily dilute your share of the bitcoin pie.

In theory, what is stopping any stock from being a cryptocurrency (minus the crypto part)? Can anything tradeable with a fixed supply become a currency? What other magic requirement is missing?

Yes, very much so (including something with unpredictable supply). Through history, diverse things were used as currency including shells, salt, silver and gold.

The commonly used definition of a currency was coined by Aristotle and is that it's an asset fulfilling three requirements:

- being an intermediary of exchange;

- being a store of value;

- being a unit of account.

You might notice that most cryptocurrencies are not actually currency owning to the first point.

Interestingly, local dispensaries at one point entertained the idea of BTC ATMs to get around the fact that they have no ability to take credit cards due to the illegal state of pot at the federal level, but this was abandoned after a bit because the volatility was too expensive to make this a worthwhile proposition.

I keep a small float in FIAT so I only do this when it’s the cheaper option.

Periodically people lose sight of that and start talking about a new paradigm and new valuations (usually because using that metric means prices are insane), but it always returns to future earnings.

All indicators are we are near the top of a spectacular bubble in assets from bitcoin to spacs to tech stock prices the red signs are flashing. Who knows how or when it ends though.

Aka the Modigliani–Miller theorem.

https://en.wikipedia.org/wiki/Dividend_policy#Modigliani%E2%...

Paying dividends is just one way a company returns profits - but there are plenty of other ways, such as share buy backs, or reinvestments in the company (thus making future returns higher).

Dividends, like rents generated by real estate, accrue based on the financial performance of the underlying asset. Dividend payout is the only way valuation has any real basis in financial performance of the underlying business.

No dividend = something else is afoot. Most stocks right now are baseball cards.

1)Possibility of issuing dividends means the valuation can't be too low. If it's too low you can just buy it out and issue dividends next year making bank.

2)The the company may hold assets valuable to other (maybe dividend paying) entities. If the valuation is too low they will just buy it out and pay out more dividends.

3)The company may buy its own stock. If the value is too low they will buy a lot of it and issue dividends later at big multiplier.

I am not sure why you're feeling so strongly about that point. It's about the first thing you learn when dealing with equities. If anything paying significant dividends right now means the business is unlikely to grow anymore.

People trade stock as if the companies were yielding something to the stock owners. Many don't. Acting "as if" the company is making those payments -- imputing a price to the stock according to the underlying fundamentals, or some temporally discounted variant -- is a fantasy. It is a symbolic act. An exercise in recursion, anchored in nothing.

The story the market is telling is a very different kind of story, now.

It is this week. But let's be honest: (1) wallstreetbets isn't a very large community compared with the whole market, or even the capitalization of GME or AMC and (2) these are investors engaged in a fun revolution.

This won't stay fun for months. These folks want to trade in those portfolios. And if this doesn't go up any farther (it's been flat at ~$300 since Thursday), how many of those will get bored and sell so they can trade whatever the next meme stock is? Not that many, sure. But enough to push the value down lower, to a threshold where more Robinhood traders decide to get out. And we have exactly the kind of feedback loop described in the linked article.

GME is going to fall because there's no reason for GME to stay high. Once the short squeeze is over and the lols play out, it's just another failing company.

(And I continue to believe that this is going to turn out to be a big astroturfed scam when this is all said and done and I'm betting a bunch of the early players will turn out to have been executing a pump and dump.)

GameStop has fundamentals. But you're free to ignore them; they're not hurting anything. GameStop has everything Bitcoin has, plus some extra things; it is therefore worth even more than Bitcoin is.

Said another way, it is nonsensical to claim that Bitcoin has no fundamentals. If you believe that (1) Bitcoin has "no fundamentals"; and (2) GameStop has fundamentals tethering it to a market capitalization of a few million dollars, what you're actually saying is that Bitcoin has fundamentals tethering it to a market capitalization of zero dollars.

Including the ability to keep making losses in perpetuity, which would make it worth negative infinity.

I'd say this is very unlikely, but it's not beyond the realm of possibility that GME becomes like a TSLA or AMZN that is constantly trying to catch up to the absurdly high expectations of investors.

Bitcoin is a completely different proposition however, because so much of the demand is driven by black market commerce, and other equally inscrutable factors. Both the supply of and demand for Bitcoin are completely volatile. There’s basically no hope of performing a reasonable analysis of where it’s value might be heading.

Wouldn't surprise me if GME does the same thing - just the sheer number of shorts will blunt the price declines a bit, as they cover.

Traditional buy/sell signals are irrelevant, because of the short seller shenanigans. The short sellers created this perfect trap for themselves, now they are scrambling to get out of using every dirty tricks. The more WSB crowd is aware of this scenario, the more they jump in to the diamond hands philosophy.

Yeah, but as I've explained elsewhere: Suppose long interest is 240% and short interest 140% (leaving net supply of 100% shares). Then, even if redditor HODLers hold 99% of actual shares, and won't sell them, it's enough if there is 1% free float, and the 141% remaining longs (who have lent out their shares to the shorts) are happy to sell at the current inflated price. The shorts can then close out their position with 140 of those 141 longs, and then you're left with 99% shares held by redditors, and 1% held by someone else who might want to sell at this point.

To squeeze the shorts, you need to control 100% or more of the long interest. I doubt that's the case here.

https://wallstreetplayboys.com/amc-gamestop-and-nokia-why-it...

The bottom line, everyone knows they can sell to short sellers at ANY price, because the short sellers have to buy at ANY price. Why would anyone sell to short sellers at less than ANY price?

no they don't. They can bankrupt, and default on their contractual obligations. And if they are smart, what they will do today is setup a structure that protects their existing assets from seizure, and then short GME, and then default if it doesn't turn out well (or gain massive profit if it does fall).

This has never happened before. Why is this happening the way it has for past week?

Those shorting shares have to pay interest, place collateral if price goes up and need to buy back those shares regardless of market price. The ones holding shares don't have that pressure and their losses are bounded.

If options are used, the effect depends on how the price of the underlying moves. Generally they just have a multiplicative effect, the losing side has to increase collateral.

A particularity of shorted calls is that losses are unbounded.

I'm having trouble scrounging up links, but a lot of good research came out of the Santa Fe Institute and associated folks.

Well, it still failed to compile because you didn't have a trailing ";" and the rest of your comment wasn't even in programming code.

Current GME situation is not investing, it's short term speculation and gambling and ideological tussle and class fragmentation thrown in. All investing strategies and tactics are thrown out the window.

The billionaire vulture short sellers got careless and lazy by shorting 140% of stock. Then, they got caught with their pants down with naked shorts and now squealing to everyone to bail them out. They could have just ate the losses, but they decided to pull all the dirty tricks and shenanigans. It may or may not work.

The WSB crowd battling the billionaire vulture short sellers are out for more than gains.

like what?

>The WSB crowd battling the billionaire vulture short sellers are out for more than gains.

I'm personally skeptical of this. It's easy to say you're doing this with noble reasons on the way up, but it's hard to tell whether the people are serious, or they they're trying to ensure there's enough bagholders to sell into.

I didn't say WSB crowd was acting with noble reasons, but they are acting with more than financial interests. If you've read recent WSB posts, lot of the emotional appeal is ideological and class fragmentation, than lolz gainz. And, very few people actually posts in forums, so you have to multiply the sentiment by thousands, if not millions.

The bottom line is the price of GME, it's still above $300. Which everyone knows and agrees is over valued. Why, especially after the turbulent week?

That's not too strange. It's entirely possible for them to close their short position by doing a private sale to another hedge fund. I don't imagine it's too hard to find takers given how inflated GME is.

(genuinely curious, I'm learning about this to distract myself from covid-19)

Maybe everybody is kinda hoping for the short squeeze? WSB is to stick it to the man but the other market participants?

The stock is shorted above 100%. If the price goes up enough, maybe the shorters will be have to exit their position and then will be the one left bagholding?

It really depends at which price they started the short. $8, $20 $350 $450?

But the puzzle is that "retail" is only a third of the market. a lot of the after hour kept it above 300 on Thursday and on Friday, and that is not the John Q Public doing those trades, so the big fish seem to be in agreement that it might be worth a try to go for the squeeze?

Therefore the gamma squeeze has a timing component, while short squeeze can happen at any time irrespective of when options expire.

Squeezing shorts is trying to make sure that the shorts (that need to buy back shares) don't find any shares to buy, thus driving up the price (as they'll offer more and more to buy the shares they're obliged to return to those they borrowed them from).

With a gamma squeeze, you also aim to drive up the price, but the mechanism is a different.

As you might know, the payoff of a call option (as a function of the stock price S at expiry) looks something like this:

  __/

The price of a call option before expiry looks basically similar, but smoothed out.

The delta of an option is the first derivative of that graph, or, to put it differently, the change in the price of the option as S goes up. You can convince yourself that when S is very low, the delta of the option is very close to zero, and as S approaches K, the delta increases, and with S much higher than K, delta is basically 1.

(Take an option struck at 50. When S = 10, it's worth basically nothing, and when S = 11, it's still worth basically nothing. So, delta = 0. When S = 200, option is worth about 150, when S = 201, it's worth about 151. So, delta = 1.)

[Gamma is the second derivative. It's basically zero when the stock price is very low or very high, as delta doesn't change. But near K, gamma rises - delta changes!]

Now, if an option trader sells you a call, you're long (you win if the stock goes up), trader is short. Trader doesn't like that risk, so they'll buy the stock to cancel out their price risk. How much stock? Well, depends on delta. If S is small, and delta, say, 0.1, they only need to buy 0.1 stock. Then, for small movements of S (say, a small increase), what they lose on the option, they gain on the stock.

However! If the stock moves substantially, particularly if S approaches K, the delta of the option goes up (gamma is not zero anymore). So, the trader needs to buy more shares to be flat again.

So, here's the strategy: Cheaply buy way-out-of-the-money call options (S << K). Then, manage (somehow), to drive the share price S up towards K. The trader who sold you the options will then buy S, potentially driving up S even further. That's the gamma squeeze.

[Note: The trader that sold you the call charged you a fixed premium at the beginning. Now they must buy the stock when it has gone up, and sell it when it has gone down. So, as the share price goes up and down, they lose money (since they buy expensive and sell cheap). If the share price goes up and down a lot, they'll lose more than they got on the premium. If the share price goes up and down only a bit, say when it moves smoothly in one direction only, or not at all much, then they'll lose less than they got on the premium, so they'll win.

That's why we say that someone that wrote a call is short realised vol: if realised vol is high (higher than the implied one that he charged you for the option), they'll lose, and vv.]

When you wrote an option, you're short vol, short gamma, and long theta. When you bought an option, you're long vol, long gamma, short theta.

When you drive the price of the stock up you increase the interests the short have to pay on the shares they borrowed to sell, or maybe increase the capital requirements they need to maintain this position on their books, reducing their upside.

If the interests or the capital requirements for maintaining the position get too high, or the owners of the shares want them back, they might have to exit their position, "no matter the cost" hence the "squeeze" part.

(I'm writing it down to see if I understood it all correctly)

It is as if the option seller (who is short gamma) follows a momentum strategy - when price goes up, they buy, when price goes down, they sell.

As for the short squeeze - why would the owner of the shares want them back from the shorters? Well, presumably to sell them.

The conversation would go like this: BlackRock to Melvin: give me my shares back! Melvin: why? B: the Price has gone up to 300! It’s insane! We are a traditional fundamental investor and bought them at at 15. We want to sell them and lock in our profit! M: ok, how about I buy the whole bunch of you, and we call it even? B: done.

All the redditors that hold on to their shares for dear life: what just happened?