Interesting past week…

Since the beginning of June, the market has seen an interest back into meme stocks like AMC, GME, BBBY, REV, etc again. AMC soared from the price of US$31.99 on 1st of June to a high of US$69.29 within one day. And on the next day, it pulled back to a low of 39.69 and soared right back up to a high of US$67.58.

AMC’s investors must have made a good profit out of the big swings. AMC management was opportunistic as well during the recent run up , selling an additional 11.6 million shares on Thursday morning at an average price of US$50.85.

In total, AMC has raised a total of US$1.25 billion through additional share issue this quarter alone. After the recent announcement, the price corrected south on thursday. On its filing, AMC cautioned its investors, “Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment”. I saw this warning appropriate after the price appreciation; buy at your own risks.

One interesting fact now: AMC is worth more than half the companies in the S&P500. In a matter of few months, the company has gone from a small cap stock to a large cap which is rather amazing, considering the time it’s happening; during the pandemic.

Retail investors began to turn the fortunes of the company around this year with my hedgies who has short positions, suffering losses. No doubt this losses remain as paper loss. In the recent surge in share price, according to IHS Markit data, these shorts have increased from 17.1% to 20% which means to say that the hedgies are hanging on to their positions. it remains to be seen how long these rally will last. In fact, some of the brokerages restrict trading on these meme stock. Prime brokers have also increased their collaterals requirement to have a position in them.

Why is this even possible?

People may ask, why is this even possible? Can the retail investors really beat the hedgies at their games?

The technical part of it: Retail investors used options instead of buying the shares outright. Options are cheap instruments, especially those options that are are deep out-of-the-money calls or puts. Option’s prices are just a tiny fraction of the share price and investors constantly used them as a hedge to their portfolio against any big market swings. It’s a syndicated movement coordinated through online social platforms. Retail investors started to buy deep out of the money calls options on AMC, for example. The market makers at this time, as the strike prices on these options are deep out of the money, do not need to buy much of the mother share in the market to hedge their options sales. As the volume and interest for these deep out of the money calls increases, the market makers started to add a premium to the price of the options and continually buy AMC shares in the market to hedge. Its lucrative business with the premium and thus, they kept on writing and the retail investors kept on buying. As the number of shares in the market is limited, this sudden surge in demand created an upward pressure on the share price. And as AMC share price surged and closed up to the strike of the put options, the market makers found themselves in a position that they need to buy more and more shares of AMC in the open market to hedge their earlier out-of-the- money put options sold. It’s an interesting phenomenon when a positive feed happened causing the price to surge even further.

When these call options become deep in-the-money, their holders would have made multiple times from their initial investment.

Whats next, should i jump into the bandwagon?

I would not! Simply, they are using options and thus the outlay of capital is low. If I am to buy the shares in the market, the cost will be multiple times theirs. Higher capital outlay equates to higher risks which i am not willing to undertake.

Maybe you can use options like them as well?

I have an investment philosophy for my own portfolio and this option is not something I am comfortable with. I do use options to hedge my positions in times of market volatility, but i used index options like Dow or S&P. Its less likely that these two indexes will be manipulated, not even your hedgies. I employ a small fraction of capital to hedge the entire portfolio which in my view, value-for-money. I would not use options on single companies due to the fact that it’s easier to rig prices of a single company. The marketplace is a dirty one and spending time in the industry, I have seen how dirty it can be.

Purely for entertainment and coffee talk

These meme stocks will continue to be a good topic to chat about when i meet up with my friends or ex-colleagues for coffee. I have no intention to participate financially in anyway. Before you think about jumping in, a casino may be the next good place to be and it’s definitely faster with just one bet and a roll.

Have a great weekend readers!