The GameStop/Reddit wolfpack plan of herding shorts into a self-destructive, short-covering frenzy seems to be failing for several primary reasons. For one, the movement appears to lack sufficient size and staying power in order to finish off established hedge funds and unconstrained individual investors who can close their eyes to daily fluctuations that have forced smaller, more short-term-performance-critical funds to throw in the towel. The GameStop model also fails to recognize that players would change targets quickly – GameStop turning to silver turning to whatever – which would weaken their stranglehold on poorer but unvanquished victims.
A leaderless posse was bound to move at different times and in different directions much like dating partners do. In short, their bond does not resemble a strong marriage.
Just as important however were the option premiums paid to panic the shorts. As I pointed out last week in a prior commentary, GameStop call premiums were priced and purchased at 700% or more volatility – an unheard-of price compared to the VIX at 25%-30%. Purchasing volatility at 700% levels reveals the investors' unreasonable hopes of future daily increases approximating 175 points (50%) or more, a level that quickly would bring even the most frenzied buyer back to earth, wondering who might be the ultimate bag holder at price levels of 500, 650,…or even 1,000 within a week's time.
As I also stated previously, the value for any of these perhaps legitimately targeted shorts must ultimately recognize herd strength, herd psychology, and option pricing if a successful raid is to be effective. Even then, the unwinding of positions eventually and commonsensically points to a musical chair, me-first exit that takes a company's stock price without fundamental prospects back where it first began.
The victims in the GameStop experiment have and will continue to be the Robinhood investors storming the gates of capital markets (for which they have an admirable objective of creative destruction of hedge fund/old Wall Street dominance) without the size, the endgame plan, and the mathematical option pricing expertise to succeed. Even without regulatory action, the plan was doomed from the beginning.