There’s a lot of things we could have talked about today… Joblessness is down a little… Gold is down a lot… The short squeeze saga of 2021 continues…
But none of these things feel like they matter.
Spoiler alert… they don’t.
The big headline of the day is that shares of AMC Entertainment Holdings Inc. (NYSE: AMC) plummeted after the company filed to sell 11 million new shares on the open market.
When a stock drops over 30% after it was up over 100% in a day, are we supposed to care?
Maybe some people can, but not me… Hell, I wrote about this all the way back in October!
Because this drama is so old hat at this point, I thought it would be constructive to go back to the beginning of all of this short squeeze nonsense and retrace our steps, one by one.
Because maybe after that, we can see how all of this is just history repeating itself…
We first noticed Robinhood traders piling into call options inOctober 2020. Open interest had risen to an all-time high across Wall Street, and that forced market makers into the open market to purchase shares of stock.
At the time, we explained it as such:
“The thing that most people don’t know, however, is that the market reacts to this the same way a sports book would when it receives too many bets on one side of a line. In order to incentivize wager flow in the other direction, they’ll just move the betting line.
Similarly, when a call option is issued to retail investors, the market maker has to go buy stocks to hedge their book.
So extreme option flow can drive prices — especially when market makers don’t ‘control’ the bets.”
Frankly, I thought we were done with it at that point… But I was wrong.
The exact same thing happened at the end of January and again in March, when the degenerate traders of WallStreetBets targeted GameStop Corp. (NYSE: GME).
That compelled us to explain the mechanism further.
“Basically, when a call option is issued to retail investors, the market maker has to go buy stocks as a hedge in case the shares get called away by the expiration date.
How much they have to buy is based on how many standard deviations (or delta, in trader parlance) the strike price is from the current stock price, and how long until expiry.
The closer the expiry and the closer the option strike price, the more stock the market maker has to buy.
And in the event those options in question happen to expire that day, and the stock in question happens to be the most shorted on the market, then those shorts are going to have to cover.”
Pretty straightforward, I thought.
Not even close…
Once the Reddit crowd was done with GameStop (for the time being), it was speculated that they were targeting silver for their next squeeze — though it failed.
And our next piece as we followed the news cycle? Gold crashing and how to play it.
Today, following a solid one-month run, precious metals are down, gold especially.
Shortly thereafter, we pivoted to crypto when Tesla CEO Elon Musk bought $1.5 billion worth of Bitcoin as the Dogecoin meme also kicked into high gear.
Remember a couple of weeks ago when all we could talk about was Bitcoin crashing and Dogecoin taking off ahead of Musk’s Saturday Night Live appearance?
The cycle continues. Much wow. Much wow.
So who wants to take a guess what came next?
If you guessed inflation, take a bow.
At the end of February, we wrote about how Michael Burry of “The Big Short” fame was joining us on inflation island…
As I put it then:
“The very first article I wrote for this website — just after Easter last year — was about inflation. […] I’ve got to be honest. While there have been a few folks out there writing about this topic, it’s mostly been pretty lonely out here on inflation island all this time.
But not anymore.
Because now, we’ve got company. And he’s kind of a big deal.”
So while I was talking about inflation for well over a year now, every major news outlet ignored it.
Yet over the past month and change, what has every major news outlet been harping on about?
So here we are again.
Talking about AMC. Talking about the short squeezes of 2021. Just like in January…. Just like in March.
And the media wants you to think it’s new, that you missed out or that its stock plummeting is going to be the end of the world.
News flash: It’s already happened before.
Just last week, I wrote about hedge funds crowding into the exact same shorts as before.
As I put it then:
“Hedge funds have been buying downside protection on small-cap stocks (via E-mini Russell 2000 Futures) all the way down to the bottom.
And in fact, they bought so many puts, they are more than two standard deviations shorter than at any time over the past year.
Worse, long/short hedge funds are crowded into the same old tired trades”
Well, if you’ve been reading along about the short squeeze of 2021, you were positioned for this already, with stakes in the aggregate of those tired trades like the Direxion Daily Small Cap Bull 3X ETF (NYSEArca: TNA), and clearly undeservedly shorted companies like Porsche Holdings (OTC: POAHY) in the portfolio.
They’re up big — roughly 20% apiece over the past month or so alone.
Take profits now and call it a day.
Because I don’t know if this is the end of this news cycle, or just a continuation of the same ol’ same ol’…
But one thing I know for sure is that no one ever went broke taking profits.
All the best,