The Big Short Squeeze
“HOLD THE LINE!” - the r/WallStreetBets battle-cry
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THE BIG SHORT SQUEEZE.
Undoubtedly, Michael Lewis’s next book will be about the events of last week.
Two simple ideas spurred the madness:
Numerous Hedge Funds bet that GameStop would go bankrupt
*One anonymous Reddit user* thought GameStop was a deep value play
We’ll start this story from the beginning.
A modern-Machiavelli had an idea…
SEPT 8TH, 2019 - THE UNDERDOG.
“Hey Burry thanks a lot for jacking up my cost basis” - u/DeepF***ingValue
In early September, an anonymous Reddit user - DeepF***ingValue - posted a screenshot of a ~$53K long-dated call option trade in the r/WallStreetBets subreddit, along w/ the quote above.
The call options were on GameStop.
The “Burry” reference was to Michael Burry - the hero of Michael Lewis’s “The Big Short” - who disclosed a large position in GameStop.
Another update followed at the end of September -
SEPT 30TH, 2019 - THE MONTHLY UPDATE.
At the end September, DeepF***ingValue posted an update of his original screenshot.
GameStop’s share price closes out the month at $5.52.
He continued to post an update on the last day of every month.
By the end February of 2020, the position was in drawdown…
APRIL 13TH, 2020 - THE BIG SHORT SQUEEZE.
The trade begins to work.
It’s the first time DeepF***ingValue provides the context that there is a short squeeze component to his thesis.
The trade is now up ~200% -
JULY 14TH, 2020 - ROARING KITTY.
The anonymous host describes himself as:
“I'm probably best classified as a fundamentals-focused deep value investor”
AUGUST 21ST, 2020 - THE CALL.
In hindsight, this is an epic call -
NOVEMBER 16, 2020 - THE CATALYST.
The former CEO of Chewy, Ryan Cohen, acquires ~10% of GameStop & sends a letter to the board.
Cohen calls for the board to seek a strategy that is coincidentally similar to the Roaring Kitty’s value investment thesis.
The anonymous Reddit user DeepF***ingValue outs himself as the host of the Roaring Kitty.
We now have a face, but no name.
His GameStop position was now worth $3.6MM -
JANUARY 11TH, 2021.
Ryan Cohen joins the GameStop board.
GameStops’s share price rises from ~$20 on Jan 11th to ~$40 on the 14th.
A portion of DeepF***ingValue’s calls expire on Jan 15th.
DeepF***ingValue closes those calls, up 15,000% on those contracts alone.
The Big Short Squeeze is only beginning -
At this point, the >2MM members of the r/WallStreetBets subreddit are worshipping DeepF***ingValue like a cult does its leader.
At the same time, the WSB cult also realizes the trade isn’t over.
They had identified that short-sellers were still short GameStop more than there were shares outstanding.
The community bands together - buying shares of GameStop - perpetuating the squeeze & driving up the price.
Melvin Capital - a large fund that is short GameStop - is bailed out by two other hedge funds.
All the while, Davos (the World Economic Forum) is underway, and *NO ONE is watching*.
A group a message-board traders are dominating headlines - the talk is that their trade is threatening the survival of major market participants.
GameStop’s share price closes *at >$76* -
The will of the members of the r/WallStreetBets subreddit to hold their positions - perpetuating the short squeeze - is unprecedented.
Even hedge funds join the trade.
The trade becomes a gigantic coordination game.
Their battle-cry of “HOLD THE LINE!” - as in, ‘don’t sell’ - enables a giant Nash Equilibria.
The fallout is profound:
Citron Research discontinues short selling research
Retail brokerages straggle to post margin to clearing houses
Subsequent trading restrictions cause national outrage
r/WallStreetBets gains 6MM new members
**GameStop’s share price closes the week out at $328**
And our hero is doxxed - his name is Keith Gill, a 34yr old dad who lives Boston -
TODAY - THE FALL OUT.
Pre-market, GameStop’s share price is still trading at ~$170 per share.
The squeeze is still alive, but losing steam.
Last week had consequences.
But it also shined a light on how markets are behaving, and - more importantly - how they are *not behaving*.
We’ll close w/ our noteworthy takeaways:
Asset prices are not necessarily representing fundamentals, especially on the downside
Short & Long/Short strategies are much more difficult than in the past
Hedge funds de-leveraged / de-grossed, perhaps permanently
That’s it for this week - hopefully things cool-off & we can get back to oil - catch y’all next Tuesday -