What Caused GameStock to Spike?
Why did GameStock go up? Was it just a bunch of Reddit traders, or was there something bigger at play? This interview with Jason McIntosh appeared on Ausbiz on 3 February 2021. It provides an insight to the potential behind-the-scenes play in GameStock. There could be more to this story than meets the eye.
Host: GameStop is still making news as retail investors continue to cause waves, but is there more than just the everyday story on Reddit? To tell us his thoughts is Jason McIntosh from Motion Trader, Jason, welcome to Ausbiz this afternoon. Alright, GameStop is still trading at those highs. What are your thoughts on that move?
Jason: What a fascinating story. It's been amazing to watch this unfold over the last few days. Really interesting. Yesterday I was hearing that behind this whole move might be a big options play. I was hearing there was a lot of volume in short-dated, out of the money calls placed before the price took off. So how the story goes is that these calls were in place before the price took off. And as the price started to move higher, the dealers who wrote these calls were effectively short, because they've written call options. So to cover themselves, they have come into the market and started buying the stock. And then there's this feedback loop which continues to push the price higher. There's already a massive short out there, and this is why this stock was targeted in the first place. The whole thing then feeds on itself. If this is true, it's amazing how a relatively small amount of capital can push a market so far. I don't know what the leverage on the options are, say it's one to ten for instance. So for every dollar of stock in an option, the dealer is going to go ahead and buy ten shares in the market, so there’s a lot of leverage in play there.
Host: Well I was going to say though, do you think perhaps it's too sophisticated just for the simple retail trader to initiate?
Jason: Yeah, there's a lot of talk about how the small guy on Reddit has given it to the big Wall Street players, that's been a popular story. It's a great tale of a David and Goliath sort of thing. But look as you say, Andrew. I just wonder, if this is just a little bit too sophisticated for the guy at home on the chat site, coming up with this international news headline story.
Host: Do you think it's over? I think it came off 25% overnight.
Jason: I suspect we've seen the highs. But this is one of the inherent dangers of short selling. Your profit potential is limited to 100% excluding leverage, but your downside is unlimited so you never can be sure whether it's over. I suspect it is, the politicians are talking about whether there has been manipulation at play? I don't know, it's just a fascinating story in history that we'll look back on. Whether it has ramifications going forward, I don't know.
Well, we've already seen the spill-over to other markets like silver. But there's just not an excessive short position there, so it seems more like market scuttle bug driving that. In Tesla last year, there was talk of like a lot of call options being bought. Was that the beginnings of this sort of move that we've seen now? And now they're taking the game to a smaller stock and gotten a massive and oversized reaction. No one knows whether we’ll ever get the full details. Nonetheless, it’s been fascinating to watch.
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I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.