| Author | Source |
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| u/dejf2 |
Tl;Dr: Not this time. You won’t regret the time spent on this. There is also an ELIA at the bottom.
Disclaimer:
The aim of the post is to display some options trading data that I believe many of us haven’t seen. It is to contextualize abnormal options trading activity on GME and dispel some myths about the put open interest.
BY NO MEANS DO I INTEND TO MAKE CONCRETE STATEMENTS ABOUT WHAT THIS DATA MEANS.
I am an ape with a research & writing background, not a financial or markets one. I am good at getting to and presenting data. Courtesy of ape’s donations, I am now working full-time on investigating and writing about GME.
I am asking for your input as to what we are actually looking at, how it works, and what the implications are. I am asking for the SEC, FINRA, and the relevant US Attorneys to tell us what this data means, and to what tune GME retail investors have been defrauded.
Throwback time:
DEEP ITM Calls Activity PT2 - April 1stUpdate on me contacting SEC about the 44m FTDs; Proposal for a ‘The Game Did Not Stop’ Project
5th of April
Now, it is the belief of some apes that on the 5th of April, there was no deep-ITM call activity due to my widely-read posts on the 31st March and 1st of April.
That is not my belief, because that would just be too hilarious to be true. If only Kenny saw how I lived.
However, the fact remains that in the week after those posts, that activity was lacking. However, new Open Interest opened up on random worthless puts again. That caught my attention and piqued my interest.
Here are the results of my almost 3-week investigation.
Observation 1: GME has some of the highest put Open Interests across all stocks
For the JULY 16 expiry, only S-P-Y has higher open puts. For January 2022 expiry, it is rubbing shoulders in terms of open put interest with stocks that have 2-5bn shares outstanding, compared to GME’s 70m.
Observation 2: Majority of that Put Open Interest is in seemingly worthless deep out of money puts, mainly around $0.5 puts.
Why is this interesting?
These puts are the most worthless items in the GME options market.
They are the right to sell 100 shares of GME at the strike price. Therefore, buying a $1 put is equivalent to betting that you will profit from selling shares at $1, i.e. betting that the price will be lower than ($1 — premium for buying the put).
It is one of the four corners of the options spectrum. It is the worthless corner. Other three corners are far more valuable.
The corresponding strike price calls $0.5—$10 calls are ‘deep-in-the-money’ — meaning the stock price exceeded the strike price, in these cases, by a factor of over 20x. For this reason, they are pretty much priced at (share price — strike price) as the likelihood of them being in the money is pretty much at 100%. They are very valuable.
There are deep-out-of money calls ($800c), but with recent volatility, reaching those prices does not seem impossible for long-dated July, Nov and leap calls. They have time value and volatility premiums that represent the likelihood of the price reaching $800 by the expiry date. None of these deep-OTM calls trade at sub—$0.05 premiums like the deep OTM puts do.
High strike price puts ($800p) represent the right to sell shares at $800, which is approximately 4-5x the current share price. Therefore, the price for these is close to ($800 — share price), they are very valuable.
All other strike prices for calls and puts are points along those scales. The deep OTM puts we are looking at are at the most worthless end of the scale. They in many cases trade at $0.01 premium per share, or $1 per put contract.
This seems insignificant, but when we look at the share numbers tied to these transactions — we MUST ask — why would somebody do something so ‘insignificant’ SO MUCH?
Additional proof to the worthlessness of these puts as well as the thesis that the holder of these puts is obtaining them for a gain other than financial:
On Feb 5, the following puts expired:
$0.5p - 22,163 OI expiring - 27,010 total volume since creation
$1p - 15,281 OI expiring - 19,531 total volume since creation
$1.5p - 6,951 OI expiring - 9,704 total volume since creation
$2p - 4,793 OI expiring - 6,549 total volume since creation
$2.5p - 4,671 OI expiring - 4,754 total volume since creation
On Feb 12, the following puts expired:
$0.5p - 35,153 OI expiring - 43,835 total volume since creation
$1p - 15,802 OI expiring - 22000 total volume since creation
In many of these cases, the party who initially buys the put holds it until it expires worthless.
Options are the casino of the stock market. The options represent bets.
What incentive is there to make such worthless bets over and over again at crazy volume?
Or maybe the question we should be asking is:
Why would somebody NEED to be writing these puts?
Observation 2b) Other stocks do not have such high open interest on the lowest strike price puts.
Here is a comparison of the Put Open Interest for GME against 4 other stocks. I have added the total Put Open Interest for the LOWEST STRIKE PRICE PUT for EVERY EXPIRY. I have then multiplied it by 100, for the maximum of theoretical shares linked to each contract, and divided it by the TOTAL OUTSTANDING SHARES for each of the stocks.
Not one of the other surveyed stocks even touched 2% compared to GME’s 53.38%. This is completely ignoring the facts that not one of those stocks is priced higher than $27, to GME’s current $160s. Many of the other stock’s strikes started at $10 and $15 for some expiries, which means that in some cases, the lowest put strike price available was above 50% of the current share price, while in the case of GME, most of these puts were placed at $0.5 and $1 strike prices, which were 0.31%-0.62% of the share price.
If every one of those put contracts SOMEHOW corresponded to 100 shares, the total amount would constitute 53.38% of GME’s outstanding shares. And those are just the lowest strike prices. Can phantom shares be created in this way?
We have a sniff of a clue in this paper:
p1: In hard-to-borrow securities, short sellers are illegally “renting” the options market maker’s exception from the locate requirement in order to obtain share entitlements and put options that they then sell and exercise for profit. In a married put, a short seller purchases put options from an options market maker who then [naked] shorts the same amount of stock back to the short seller as a hedge. If the stock sold is not a threshold security, then the options market maker may fail and never deliver. A married put can be disguised as a market-neutral reverse conversion. Married puts in Overstock executed, in part, on the CHX exchange indicate several layers of fraudulent, manipulative and criminal activity:
1. Engaging in securities fraud by knowingly failing to deliver securities
2. Mis-marking intentionally short sales as long.
3. Engaging in market making activity that is not bona fide.
4. Failing to comply with Regulation SHO close-out requirements (“rolling the fails”)
5. Agreeing in advance not to demand delivery through buy-ins (i.e., criminal collusion)
p6:
Married Put mechanism per Wellborn paper
p7: The outcome of the married put is that the actual naked shorting occurs on the books of the options market maker. Regulation SHO says that, at T+13, the options market maker need not locate and deliver the “shares” he sold. Options market makers face no penalties for failing to deliver. Similarly, the short seller has no incentive to buy-in the market maker, as that would create upward price pressure on the stock—just the opposite of what a holder of a real or synthetic short position would want. Even if that were not true, it is common knowledge that buy-ins are rare. In a 2003 SEC Interpretive Release, the Commission expressed concern about “the manipulative sale of securities underlying a married put as part of a scheme to drive the market price down and later profit by purchasing the securities at a depressed price.” With increased scrutiny on married puts, anecdotal evidence suggests that they are being masked within market neutral trades known as reverse conversions. Classically, conversions and reverse conversions were riskless arbitrage transactions that converted common stock into options (and vice versa).
p9: “Those trades could be done to generate new “bullets” with which to depress the share price. It is also possible that the married puts are being used to roll failed positions.”
p9-10: “In May 2007, the American Stock Exchange disciplined SBA Trading for abusing the options market maker exception through the use of fraudulent use of married puts and reverse conversions. It is a FACT that the Arensteins engaged in fraudulent options market making on this stock. This course of conduct enabled Respondents to maintain impermissible short positions in a number of Reg SHO threshold securities for extended periods of time.”
My comments: The GME case is different from the one discussed in the Wellborn paper. Throughout the paper, the married puts cited are described and implied to be in-the-money puts. On GME, we can observe incredible out-of-the-money put anomalies.
However, not every tactic of the 2021 Abusive Short Seller will be described in papers from 1999-2013 that most of current GME DD is based on.
We will never have all the answers presented to us, though.
However, from this paper and the SEC Risk Alert about deep-ITM calls, we can be CERTAIN that both calls and puts will show anomalies somewhere if fraudulent activity surrounding maintaining illegal short positions, creating phantom shares, and rolling failed buy-in obligations is taking place on a stock.
This is just where I found the anomalies on GME.
It shouldn’t be my job as a retail investor to have to determine exactly how these anomalies link to and explain that activity, that is a job for the SEC, FINRA, the United States Attorney for the Southern District of New York, as well as probably Chicago and Philadelphia.
This is just the data I found.
GME Phenomena relevant to the Wellborn Paper
1. Abnormally High Put Open Interest on seemingly worthless puts
MYTH:
The Abnormally High Put Open Interest on $GME is a remnant of (possibly naked) shorting in 2020 and early 2021 (pre-January squeeze).
Implication: Yes, there was naked shorting on GME, but it is possible this was covered in the January rally.
FACT: These puts were almost exclusively opened DURING and AFTER the January rally.
The above graph is the net change in open put interest on all the puts that I suspect of having been manipulated.
If the abnormally high put open interest was accepted as a remnant of pre-January naked shorting, wouldn’t this chart make that proof of naked shorting happening on GME heavily during the January spike, and also preceding the mid-March drop?
A 1990 paper that I paid $25 for may hold a clue:
“Our results indicate that securities with high levels of short interest tend to have higher betas and traded options and convertible securities associated with them. Changes in the open interest of options are positively related to changes in short interest. To examine this, we looked at coincidental changes of the open interest in firm options and changes in a firm’s short interest. Table 5 reports the aggregate simultaneous increases and decreases in short interest and open option interest based on the expiration cycle. The statistical results are easily significant at the 0.01 level and indicate that short interest and option open interest tend to move together. Tests performed on individual years also were significant for each year. The short interest changes tend to be positively associated with changes in the open interest of options.” - Brent, Morse & Stice (1990) — “Short Interest: Explanations and Tests” (Journal of Financial and Quantitative Analysis, Vol 25, No 2, June 1990)
In this fashion, there have been 90+ strike price & expiry date combinations used since January 2021 to perform this suspicious activity. They are:
FEB 5 0.5p FEB12 10p 16 APR 9p FEB 5 1p FEB12 15p 16 APR 10p FEB 5 1.5p FEB19 1p 16 APR 11p FEB 5 2p FEB19 2p 23 APR 5p FEB 5 2.5p FEB19 3p 23 APR 10p FEB 5 3p FEB19 4p 23 APR 15p FEB 5 3.5p FEB19 5p 23 APR 20p FEB 5 4p FEB19 6p 30 APR 5p FEB 5 4.5p FEB19 9p JUL16 0.5p FEB 5 5p FEB19 10p JUL16 1p FEB 5 5.5p FEB26 3p JUL16 1.5p FEB 5 6p FEB26 3.5p JUL16 2p FEB 5 7p FEB26 4p JUL16 2.5p FEB 5 8p FEB26 4.5p JUL16 3p FEB 5 9p FEB26 5p JUL16 5p FEB 5 10p FEB26 5.5p JUL16 5.5p FEB 5 11p FEB26 10p JUL16 6p FEB12 0.5p MAR19 1p JUL16 7p FEB12 1p MAR19 2p OCT15 1p FEB12 1.5p MAR19 3p OCT15 4p FEB12 2p MAR19 4p OCT15 6p FEB12 2.5p MAR19 5p NOV19 3p FEB12 3p MAR19 6p 21JAN2022 0.5p FEB12 3.5p MAR19 10p 21JAN2022 1p FEB12 4p 16 APR 0.5p 21JAN2022 1.5p FEB12 4.5p 16 APR 2p 21JAN2022 2p FEB12 5p 16 APR 4p 21JAN2022 3p FEB12 5.5p 16 APR 5p 20JAN2023 2p FEB12 6p 16 APR 5.5p FEB12 7p 16 APR 6p FEB12 8p 16 APR 7p FEB12 9p 16 APR 8p
The following graph is the build up of Open Interest on these puts over time.
This is the total puts opened since January, ignoring expiry. It assumes 100 phantom shares were indeed created for each of these suspicious put contracts. Of course, market mechanics and the level of callousness of the naked shorter dictate that in reality, that number can be anywhere between 1 and 100, and as of now, we have no way of determining which. My suspicion is on the same side of 50 that yours is on, but there will be more data in a second to explain why.
If it is indeed true that between 1 and 100 phantom shares were created corresponding to every put, then between 1,277,520 and 127,752,000 phantom shares of GME have been created between 11th of January and 9th of April.
Full sheet:
What else is new?
2. Out-of-this-world Put Trading Volume 3 & 4th March
Going back through all these suspicious expiries, something else cropped up. On a range of them, several days had spikes of trading volumes that far exceeded the put open interest.
Exceeded how far?
As far as 232,364 traded volume to 1,155 open interest. The equivalent of total open interest changed hands every few seconds in blocks of 500. This happened to a range of puts:
This activity crops up on some other days, but not to this level.
March 3rd and 4th were real anomalies:
Options Trading volume suspicious on grounds of volume far exceeding Open Interest, 11JAN-8APR
How out of the ordinary is this?
Between MAR 3 & 4, a total of 1,676,236 contracts changed hands, both calls and puts.
This activity constituted 1,094,004 — or 65.26% of the options trading activity on GME for those two days.
The next day, March 5th, there were only 388,638 contracts traded in total, even though it was a Friday.
All of this volume on March 3 & 4 happened across these strikes:
9 APR 5p, MAR19 4p 26 MAR 5p, 1 APR 5p, JUL16 2p, JUL16 2.5p, 16 APR 1p, 16 APR 1.5p, 16 APR 2p , 16 APR 2.5p, 16 APR 3p, 16 APR 3.5p, 16 APR 4p
So what the hell is this?
I’ll tell you what it is not:
It is not any HFT, algo trading, scalping or any way to make money. One look at the transactions on the 9 APR $5 puts proves that:
1,256 9 APR $5 put contracts were open after the trading session on 4-MAR-2021
But 232,364 5 APR $5 puts traded during the session of 4-MAR-2021:
— 230,009 traded between 13:56:14 and 14:51:40
— 229,997 traded at the same price, of $5 per contract.
Similar is true on other strikes with this unusual volume. There was no profit opportunity here. The benefit had to be a regulatory / loophole one. Why else would somebody generate “worthless” activity that exceeds the average option trading volume a couple times? Is this another way to reset FTD and buy-in obligations, like the deep-ITM calls? I believe contextualizing these spikes within the timeline helps us understand what they can be:
A hint, perhaps.
The Weird Coincidence
It is a good thing that composing this DD took a few days longer than planned. While watching some brainless TV, a lightbulb moment launched me from my seat.
What if I were to compare my two charts, and take the:
The Max Amount of Phantom Shares related to Open Interest up to MARCH 2nd…
And compare it to the Volume of the March 3 and 4th Put Volume spike.
Those two numbers fit within each other almost perfectly.
So now, let’s get the SEC to tell us why this data is nothing to worry about.
Because as a retail investor in GME, I am mortified.
The possibility that there are 127 million phantom shares on top of the rightful 70 million, does not fill me with confidence in the US stock market.
Gary, pls fix.
ELIA ATTEMPT as requested:
Interestingly, GME has abnormally high number of puts open out of all stocks. It has more puts open than stocks that have billions and billions of shares.
Interestingly, most of those puts are placed on “worthless” puts - around $0.5-10 strike prices, meaning bets that you will profit from selling shares of GME at $0.5-10. Nonsensical bet to make. Let alone to make a million of these bets.
Most interestingly, those bets, hundreds of thousands of these puts, were primarily made during the January price run-up, which makes them even more non-sensical.
There are proven incidents of married puts being used to mislabel or enable transaction that naked shorted a stock - creating phantom shares. They worked differently than they seem to do here. I can’t say if this is the same thing.
All I know, is that there were 1,277m of these puts opened since January, and most of the time, they haven’t been traded. The party who creates/purchases these new puts has an incentive to hold them, other than financial. It is my suspicion that each one of those puts corresponds to between 1 and 100 synthetic shares of GME being created.
Interestingly, on 3&4th of March, 1,094m puts were traded on strike prices that had 1000-6000 open interest, making it highly suspicious. GME would get maximum 500-800k option trading volume across two hot days. 3&4 of March, they get 1.6m+, with 65% of it being this seemingly nonsensical activity. All of the puts traded at the same price, offering no profit opportunity. None of those puts remained open at the end of the day. It is my suspicion that somehow they are being used to reset FTD and buy-in obligations, in a similar fashion to the deep-itm calls.
The number of puts opened from 11 Jan until the 2nd of March, the day before the trading spike was 1,096m. Those two numbers fit within each other to 99.75%.
What a curious story.
Courtesy of the ape’s donations, I am researching and writing about GME full-time. You can find all of my published pieces in my profile, as well as a link to support the project, which one-day will become a book combining the timeline of empirical DD intertwined with my own personal story. I sold a car to average down, so that half should be interesting, too.
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