interesting thread.
I'm far from an expert here, but if I'm correctly interpreting this, they are going to use GME to bring down the stock market ahead of the election. My take is this is a white hat operation, as the stock market is one of the only remaining pillars that the average normie has any trust in, or rather, takes security in. The other side of that coin is continuing to press on the Clockwork Orange strategy, remove the last bastion of hope (nest eggs) and get people to take whatever globalist solution is offered as good enough. I hope its the former vs. the latter, but not sure.
Someone smarter and more educated on this topic should weigh-in, but it appears that someone(s) has quietly built a significant portfolio of call options and balanced that by owning enough shares of GME. This has put almost every hedge fund, who all have had short positions in GME due to the "fundamentals" in a losing position. In isolation, this wouldn't be that big of a deal, and happens more often than you realize, but this is slightly different. There are 2 major differences that could have very significant implications in this particular instance.
- The spread on the calls vs. puts
- The leverage ratio held by the hedge funds
- Interest on borrowing debt
The GME/AMC noise a few years ago was the start. In normal market making trades, if a hedge fund misses on one stock by $2-3 (i.e put position at $18, call at $20-$21), the hedge fund loses the spread ($2-3), but typically can make that back and then some on another position, giving them a winning long-term strategy. The overall risk here is in the 10-15% range. In this instance, the calls are at $20, and many of those puts are <$5, meaning the risk here is in the 400-500% range. That is material.
Again, a few years ago, the macro environment at that point was still driven by pretty low interest rates, meaning that the hedge funds could borrow debt from banks at a much more reasonable rate. They, and every "fund" (i.e. private equity, venture capital, etc...) built their funds the same way; raise $100's of millions of private capital, and then use that capital as collateral to borrow debt at 5-10x leverage ratios, so that $100 million turned into $500million to $1B in "funds." The plan is to return 2.5-3X that fund (i.e. $1B returns $2.5-3B in funds) and you essentially use debt to give yourself the ability to make more money by taking more risk in more positions. With the rise in interest rates going from 2.5% to 7.5% (3X) the impact on hedge funds is amplified significantly, This is where it gets much more interesting on a broader perspective.
If this dude executes those calls, and he will, then the hedge funds are going to have to "sell" the stock to him at a 3:1 loss ratio (difference between $5 put and $20 call = $15; $15/5 = 3). Additionally, they are going to have to buy those shares in 1-2 ways
- exit existing positions early - an absolute killer in the hedge fund world as timing is EVERYTHING
- borrow debt at 3X the cost of what they borrowed.
So playing this all out. If a hedge fund has a $100M short position in GME, and you factor in all of these variables, for every $100M in short position they have they would pay $100M x 3 (loss ratio) x (5-7 leverage ratio) x 3 (interest rate spread) = $4.5-6B on this one trade. So instead of a standard ~20% risk they are taking 5000%. That makes the mortgage risk model from 2007 look downright conservative.
Most hedge funds have a position here, certainly all of the big ones. If they have to do this, it could literally kill all of them in one fell swoop, which would also bring the market down in a major crash because ALL of their positions would be exposed and increase in risk almost instantaneously.