The Market is Now Game $GME $AMC $AMCX $NCMI $BGS

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When history is written about GameStop, the book will start with Dave Portnoy and Davey Day Trader Global.  Here’s a degenerate sports gambler who is completely bored during a pandemic and discovers speculating on stocks is fun. Add in stimulus payments, boredom, and millennials controlling $5.4 trillion of wealth, and a lot can happen.

A lot has been written as to why GME is ripping higher, so I just want to add in a few of my own observations.

Gamestop’s price action really comes down to high short interest combined with gamma hedging.  When someone is short a stock, or betting against it, they need to borrow the shares and hopefully return them at a lower price. That’s how they make money. However, your downside is theoretically unlimited because the stock can theoretically go up and up and up. As such, when a stock rips higher, shorts typically need to cover their position so they aren’t destroyed.

The second factor is gamma hedging. Reddit users on r/WallstreetBets are buying a lot of call options. The seller of those call options needs to protect their position, so they actually buy some stock as a hedge (selling a call is a bearish position, so to be more neutral, they buy the stock). When the stock rises, they need to buy more stock to continue their hedge (this is really delta hedging).

So as you can see, even if Reddit users or Robinhood investors don’t have a lot of money, they can drive extreme price movements from what others have to do. Just recently, Melvin Capital needed a bailout because its short on GME blew up. In fact, it seems to me that Redditors are going line by line through Melvin Capital’s short book and trying to blow him up.

Even a Blockbuster remnant is surging.

AMC, the movie theater chain, has been issuing equity en masse to stay alive while theaters are shut down. It has completely diluted shareholders. Share count is now 7.5x higher than it was pre-pandemic. They also had to take on more debt. Even if theaters were packed tomorrow, I think returns would be abysmal for shareholders. And yet… the stock has surged.

But what is really  funny is that AMC Networks, the TV network that had Madmen and The Walking Dead, is also ripping in sympathy.

Buyer  beware.

I don’t plan on adding any fuel to the fire on these names. It is funny that some names I have written about previously are being taken up in the rush, like National Cinemedia, Big Lots and B&G foods.

There are some interesting transactions out there. Andrew Walker posted on Twitter about selling puts on GME. When you sell an option, you are really selling volatility. Given GME has been incredibly volatile, you can make some decent trades.

Look at the $0.50 put options. If you sold 1 contracts you could need to set aside $50 as cash to secure the position and you would collect $3. That may not sound like much, but that’s a 6% return. Over 79 days. Annualized that more like a 30% return.

The only way you lose is if GME crashes to less than $0.47 (or 99.8% from here, lol), which is way below where it even traded when its outlook was terrible (it’s worst was around ~$3.50). Look at the interest as well and the volumes. You could sell A LOT of these contracts for your PA.

My thinking is GME will clearly issue equity. And because the price is so high, the dilution will be low and then they’ll have cash. This will raise the floor that the stock used to trade at.

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