DD
This is an extension of my DD series on GME. I have been investing in, learning about, and following GME since September 2020, and in that time I have learned many things. It is also likely my last post on GME for a while as I find myself repeating key points, and others are doing excellent DD on GME in the meantime.
In this post, I’ll share as much understanding as I can about how we got here, about shorts, and my thoughts on the future of GME. I’ll also try to include many tips around trading/investing with GME going forward.
TL;DR: The squeeze has been reset. Shorts have re-set their short positions at much higher sell points, and longs have likely cycled through. I don’t believe a VW-style squeeze is possible because Robinhood will just get choked again, but I do believe $GME is worth much more than $50/share. Fuck “diamond handing”, I’m starting to accumulate shares again. I share below how I’m trading GME.
Previous Important Posts
If you haven’t read them and have time, they will provide some background on my previous analysis.
- EndGame Part 1 (DTC Infinity) covered the short positions, the float, and potential snowball impacts of increasing prices, and argued that part of the reason that shorts haven’t closed was that it was pretty much impossible for shorts to close
- EndGame Part 2 covered Cohen, fair market cap analysis, and potential investors, in which I talked about the amazing mid-to-long term potential for GME.
- After the Citron tweet, I shared this fan fiction on what looked like blatant market manipulation by shorts on the day of the tweet, and offered some education on strengthening your position. This one got buried and is worth reading.
- EndGame Part 3 covered the gamma squeeze, potential shady tactics by MMs, and some tips for staying safe.
- EndGame Part 4 covered the continued gamma squeezing and the resulting tenuous position of the ~50M shorts that were still in GME.
- EndGame Part 5 (deleted by mods, posted by someone else in comments) went into the implications of the absolute mindfuck trick the shorts pulled when they limited buying of GME (and other heavily shorted stocks)
Important External Reading
These three non-reddit articles are critical for understanding the short playbook. This is essential reading if you want to understand how the funds that are short GME may have manipulated/directed the DTCC to strong-arm Robinhood to halt buying on the 28th. My key takeaway from all this is that the core investigation needs to be happening with the DTCC/NSCC to understand why the margin changes were forced upon RobinHood, and who specifically asked for the buying halt on the 28th. I believe shorts worked together with brokerages and the DTCC to rob investors of over $40B of value, representing what is probably one of the greatest financial crimes of the century.
- Anatomy of a Short Attack - Seeking Alpha article from 2014. Can’t link it. Search for it. Key tactics that shorts use (and have used on GME)
- Flooding the offer side of the board
- Leveraging counterfeit shares
- Media assault (see my post on coordinated put buying with the Citron post, and pay special attention to media treatment of GME to drive down sentiment)
- Analyst reports (BofA coming out with a ridiculously low price target)
- Frivolous SEC investigations meant to distract the SEC
- Pulling margin from long customers
- Illegal Naked Shorting: DTCC continuous net settlement and stock borrowing programs have loopholes that facilitate illegal naked shorting
- “There is an integral relationship between the DTCC and hedge funds”
- On regulation SHO: “However, Wall Street has a bag of tricks to get around this requirement. One of which is simply to ignore it. Another is to roll the position to another broker-dealer. Oftentimes, fails to deliver can last for months or years. The SEC seems strangely unwilling or unable to enforce this provision of Regulation SHO.”
- “How phantom shares on Wall Street threaten U.S. Companies and investors” (March 2020)
- This article is a bombshell - a former DTCC employee whistleblowing fraud in relationships with DTCC and short funds
- What’s happening with GME happened before with Fannie Mae and Freddie Mac: “evidence that more shares were sold than ever existed”
- “The main problem is that Reg SHO has no real teeth for enforcement. The brokers are never called to be responsible for their behavior.”
- Banks play by different rules! ”The SEC continued to declare that fails to deliver were not an indication of naked short selling. That changed when Goldman Sachs and other financial firms needed to be protected. Trimbath pointed out that not till the banks/broker-dealers began to see massive numbers of fails to deliver in their own shares did the SEC put a short-selling ban in place – but only for the shares of banks, insurance companies and securities firms, including the very culprits responsible for the dirty system.”
- “Who controls the DTCC? The answer is that the banks and brokers who use DTCC’s services, who process trades there, who fail to deliver there, are insiders who sit on the DTCC Board of Directors.”
History of shares and shorts on $GME
Here’s some history on GME that’s worth knowing so you understand the context of where we are today.
- GME used to have many, many more shares outstanding. Back in 2009, there were over 160M shares outstanding, and GME has steadily been reducing the number of shares outstanding through buybacks and share retirements, concluding with a massive share 40% buyback in 2019 pushing GME under 70M outstanding shares.
When you look at a price history chart, you need to factor this in. So when GME’s share price was $50 in 2008, its market cap was actually $8B not $4B like it is today at $50/share.
- GME used to be in the S&P 500. It was added in December 2007 when it had around an $8B market cap and removed in April 2016 when its market cap had dropped to around $3B. In 2016, there were about 25M+ shares shorted of GME. It’s very likely GME was shorted out of the S&P.
- Short interest did not decrease after share buybacks. In 2019, GME bought back and retired 40% of their shares yet amazingly the short interest increased. How is it possible that shorted shares, if not naked, did not have to find new borrows to cover? How could they have found 30M borrows in such a short period?
https://preview.redd.it/axl9ipwqw2i61.png?width=937&format=png&auto=webp&s=bd2743962405738469193d7e6c59d3068f1f8d78
- How were shorts able to increase their short position by 20M shares in such a short period of time? In July 2019 GME bought back and retired 10M shares. At the same time, shorts increased their short position by 20M shares. How is this possible? How could they have borrowed 20M more shares while shares are being retired and removed from float?
https://preview.redd.it/d9fdeyrrw2i61.png?width=1030&format=png&auto=webp&s=3efeb376b15e8574e98fa90622c79f1eadcd8772
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Shorts did not close at $3 because of a tax loophole. Shorts had been shorting GME since it was well over $40/share in 2015. By April 2020, GME had dropped to under $3, and shorts were sitting on billions in profit. Why not take profits? A little known tax loophole allows hedge funds to pay no taxes if a company they shorted goes bankrupt, as they do not need to close the trade, so the profit is not realized.
- Many of the major short funds are disciples of Steve Cohen, who previously paid billions to settle insider trading charges. Maplelene capital, Melvin, others are all Steve Cohen cronies. Who bailed out Melvin? Steve Cohen.
- There are many strange connections between DTCC’s actions and shorts. As you know DTCC/NSCC put a gun to Robinhood’s head demanding billions in liquidity to support their customers buying GME. At that point more than 50% of Robinhood’s users had GME.
- Robinhood is only worth around $10B. The amount being asked for from DTCC was likely to drive Robinhood into the ground had they not found a solution.
- Key question: Who suggested the buying halt? Was it Vlad? Or did the DTCC suggest a buying halt to as a negotiating tactic to reduce the liquidity requirements? Sounds very much like a “turn off buying or else” kind of arrangement.
- Keep in mind, that at this point shorts were on the verge of losing upwards of $50B as GME was well on its way over $500/share. So Citadel doesn’t care about shooting down Robinhood. It’s a minor toe amputation to save their leg.
- The 4am call from the DTCC happened 2 days after Citadel and Point72 bailed out Melvin and 1 day after the put:call ratio for GME flipped 3:1 for puts - not only was this coordinated, shorts knew this was coming and profited from it
- If a regulator/lawmaker/SEC agent could figure out who bought those puts, you’d know something interesting.
Why GME went up
- Many pundits in the media were extremely confused why the price of GME got so high. Let me try and explain this.
- First, the current price of an equity is just the last traded price. This is a very, very critical piece you need to understand. When there are 70M shares outstanding, and 1M shares get traded back and forth multiple times a day, the price you see is just the price of the active float trading back and forth. This is why many technical traders pay very close attention to volume. When there’s high trading volume relative to total float, it’s easier to believe the price is more reflective of actual underlying value.
- In the case of GME, supply and demand is the critical driver of price. As I mentioned in EndGame Part 1 the true supply of GME shares (tradable float) is ridiculously low)
- The demand side comes in 4 parts:
- Value buyers - people like DFV who saw a company at $4 valued less than 1 year cashflow and decided to tell the world about how great of an opportunity this was
- Squeeze buyers - people and funds that smelled blood in the water and bought shares in anticipation of someone else needing to pay more
- Shorts covering - shorts that needed or wanted to buy as the trade went against them
- MM hedging - repeated gamma squeezes that had an outsized impact on price due to the low underlying liquidity of GME
- For a normal equity, most of that demand side does not exist. Low supply + high demand = high price. That’s why GME shot up.
The Big Reset
This wasn’t just a squeeze, this was a massive reset on investors (long and short) for GME.
- Any SEC filings (13G/13F) showing positions prior to Feb 1 are irrelevant (other than insider positions). It’s very likely many longs liquidated during the squeeze, and likely many shorts covered. Some of those longs that liquidated may re-invest, and some of the shorts that covered may re-short.
- Shorts were given a huge bailout, whereas they previously were sitting on losses upwards of $50B they were instead able to close positions at much lower share prices, with GME currently sitting at $49/share - a 90% reduction from its peak of $500/share prior to the buying halt on the 28th.
However, this is not the end for GME
- Everything started with value on GME
- At $50, we’re back to a value play. GME’s market cap is now under $4B. Remember that GME has over $1B in e-commerce revenue alone every year and e-commerce is growing at 300%. For more on market cap potential, go see EndGame Part 2 or the excellent gmedd.com
- Nothing that happened in the last few weeks has changed the core fundamentals of the business or the prospects for a Cohen-led revitalization, so if you were in this for Cohen at $20-35, we’re not too far off from that right now.
- If people can afford to hold their shares, the float continues to shrink
- Wild cards remain (in order of decreasing likelihood)
- Cohen still needs to buy his 7%. He’s likely waiting for a good signal from the board that he’s going to be CEO as well as a good entry point. The officers added to the company on the board also need to buy their shares. They are not buying in at squeeze entry points.
- Key point: When insiders buy shares, their shares are removed from the lending pool. This is part of the GME corporate bylaws. I believe this is likely what triggered squeeze 1.0, as that happened roughly 2 days after Cohen’s 9M shares were likely recalled when he got added to the board.
- Regulatory involvement. It’s really unlikely the SEC is going to step up and enforce their own fucking rules, but hey if they did we might see some reductions in fails-to-deliver and the blatant naked shorting happening with GME.
- Share recalls for a vote. There are a number of reasons this could happen. I think it’s unlikely but if this were to happen non-naked shorts would need to cover.
- People moving out of Robinhood to brokers that can stop lending their shares - After this shitshow, I moved a few thousand shares out of RH. I didn’t realize they were being lent out to shorts and Robinhood was pocketing the difference.
- You can only get Robinhood to stop lending your shares if you move to a cash account, but interestingly Robinhood’s instructions for how to downgrade to a cash account have disappeared from their site. (Try clicking on “downgrade” under Robinhood Cash here). Shady AF.
How I’m thinking about GME now
This is going to sound extremely strange, but I’ve never been more excited to lose money. I am holding several thousand shares in GME, but my position is only about 25% of my desired position, and I can’t wait to buy GME at lower prices. I hadn’t bought any shares since $35 (see my part 2 when I said I went all in), and sold on the way up to take some profit, but I’m slowly starting to add again around $50 with the profits I made from trimming on the way up when it got above my price target I shared in part 2 of $125.
None of this squeeze drama, broker drama, etc. changes the fundamentals of the company and why I was bullish in the first place. I think that the core short thesis of “GME is another blockbuster destined for death” is dumb and I think Cohen is going to cause a future re-rating of the company.
Since part 2, some interesting developments have happened at GME, including the addition of new officers of the company (more Chewy execs and one ex-Amazon exec as the new Chief Technology Officer).
I believe strongly that Cohen has a strong chance of becoming CEO. I don’t think they would have been able to add the talent recently had it not been for him, and the creation of a tech officer position is a clear signal that the thinking of how to run the company is changing. (Think about it - if this was just blockbuster with a website why would they need a Chief Technology Officer?) Big plans are afoot folks. $4B for GME is cheap.
That being said, I’m hoping for a further dip. I’m selling puts from 40 down to 10 hoping to score as many cheap shares as I can, and to take advantage of the still-insanely-high IV.
Suggestions
This is going to be a long fight. It is painful for all of us, regardless of your cost of entry, because longs would have won the battle had the market remained free. Instead, funds, clearinghouses, brokers colluded to restrict buying and eliminate the demand side of the market.
Here’s some thoughts on managing your GME positions going forward.
- Take advantage of IV while it is high. While IV is still high, sell puts if you want to add, sell calls to reduce your cost basis. For example, I sold 2/26 9p for like $0.5 - that’s a 6% return on capital in less than a month, and either I own GME at $9 (awesome!) or I keep the premium (also good). I personally believe we will not be allowed to squeeze unless regulators step in and open up the market here, which will not happen quickly, if ever. So I’m selling calls against my remaining shares.
- I also sold some Nov 70p for ~$42. Let me explain this trade for those of you that don’t sell puts normally. Selling puts gets a bad wrap of “pennies in front of a steamroller” but this is not the case with GME if you do it right.
- Someone paid me $4200 now for the requirement that I would be forced to buy 100 shares of GME at $70 in november (total of $7000).
- So I have to set aside $2800 of my own capital to secure this put.
- Two scenarios:
- So, in my mind, this is a trade that “can’t go tits up”.
- “Downside” risks:
- Have your own price target: Keep a valuation target in mind below which you believe it makes sense to add, and above which it makes sense to trim. If you are in need of some research here, see gmedd.com. I also wrote my own long-term bull targets in EndGame Part 2. Buy low, not high folks - don’t fomo.
- Stop sharing your positions publicly. I know this is anti-wsb, and I think sharing them is great for this community, but in the case of GME it’s an attack vector for you.
- Be careful of holding weeklies until expiration. Remember the multiple trading halts? What if trading gets halted on Friday at 2pm and doesn’t resume for the rest of the day? All your calls would expire worthless. Depending on your broker and your cash positions, maybe even your ITM ones. Roll (or sell, if you’re taking profits) your weeklies well before expiration.
- Get the F out of Robinhood. While Robinhood was just a pawn IMO, why do you want to use a broker that can F you so easily? They lend your shares to shorts and don’t pay you for it, margin call you when you’re winning, sell your shares at absolute lows, and pass all your data to Citadel. I don’t think the “free” commissions are really free. RH is worse for your financial future.
- Minimize regret; don’t maximise profitability. I sold some shares “early” on the way up to take out my cost basis and some profit. I missed all the peaks (never sold any shares above $400), but holding out for “maximum profit” led to a bit more regret when things went the wrong way.
- Don’t bet more than you can afford to lose. I’ve been in GME long enough to know that just when you think going up is a sure thing, you can be surprised by a new trick. If you bet it all on weeklies all at once, you may not be able to recover from being wrong on the timing. Consider longer expiry or spreading your purchases out. I’ve held through multiple 50%+ drawdowns in the underlying; you need to be ready for the volatility.
- Watch out for stop loss hunts. It’s common practice for shorts to hunt for stop losses for cheap shares. If you’ve set a stop loss, be really sure about it.
- Don’t sell on dips. You’re only helping the shorts. If you need to sell to take profits, sell when it’s heading up. Sell high, not low retards.
- Save dry powder to buy on dips. Dips manufactured by shorts are buying opportunities. Take advantage of folks with paper hands to capture shares at low points. GME has incredible daily volatility. Set a low limit buy and just wait for the order to fill. Have patience when buying.
This is not financial advice; do your own DD. I’m holding what previously was valued at over $1M in shares and calls. And I added 1500 shares these last 2 weeks as well as sold hundreds of puts to either capture six figures of premium or buy 7 figures worth of GME at price points I find attractive.
Bonus: If I was Maxine Waters, what would I ask?
On February 18th, Congress will be interviewing Robinhood, Melvin, Citadel, and DFV. Here are some questions I’d love to see asked with the answers aired out in public, under oath.
Dear Vlad,
1) Have they ever had such a dramatic margin increase request from DTCC before?
2) How much time have previous requests been given to accomodate vs this one?
3) Who suggested the solution of restricting buying? Was it Robinhood or suggested by DTCC as a concession in return for a reduced margin requirement? What other solutions were explored and why were they not pursued?
4) To his knowledge, are there any historical professional or other relationships between the decision makers in the DTCC to the funds that are/were shorting GME
5) What is preventing this from happening again, should GME’s price rise again to $500/share or more?
Dear Kenny G,
1) Could you explain the reasons for your bailout of Melvin capital?
2) How many members of the DTCC are former Citadel employees?
3) Did you or anyone in Citadel communicate with the DTCC prior to their margin changes to robinhood. If so, what were the nature of these communications?
4) What positions did Citadel take against GME prior to the buying halt on the 28th?
5) Did Citadel share any of its order flow data with any hedge funds shorting GME
6) Did Citadel have any communications with Robinhood senior management in the weeks leading up to the 28th?
Dear Plumpkin,
1) Please explain how shorts are able to short greater than the outstanding float of an equity
2) Short interest increased by 20M shares in July 2019. Did Melvin increase their short position in that timeframe? If so, please explain how you were able to borrow shares when 40% of GMEs float was bought back
3) Please explain the method by which hedge funds do not pay taxes when they have a short on a company that has gone bankrupt
4) Are any members of the DTCC former employees of Melvin Capital? If not, please share what communications between the DTCC and melvin capital the weeks leading up to the 28th
5) Did you have any agreements written or otherwise with other major shorts of GME. I e. Maplelene Capital
6) There were 6000 short term puts purchased within 30 minutes prior to Citron’s tweet announcing their pending argument against gme. Did Melvin capital purchase any puts on that day in that time frame?
7) What was the arrangement between citron and melvin capital?
8) Have you ever paid for media placements against GME
9) Please explain why you could state that you have closed your short positions when your recent filings say otherwise
10) Did Melvin open short positions on X-“R”-T when they closed their short gme positions
11) Please explain your process to locate borrows for shorts. With whom in the DTCC do you cooperate with?
12) Has Melvin Capital ever been forced to buy-to-close short positions as a result of Regulation SHO / fails to deliver?
