The GameStop Saga has Evolved into a Battle of Wills


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In January, GME stock saw an epic squeeze, but in March, it's something different

Particularly at this point, I don’t believe that a “short squeeze” has much, if anything, to do with how GameStop (NYSE:GME) stock is trading.

Yes, the original trade that sent GME stock soaring back in January looks like a well-executed short squeeze. It nearly bankrupted one hedge fund, Melvin Capital, and caused huge losses at many others. The coordinated effort led (largely) by traders on Reddit was brilliant. It combined an intriguing fundamental case centered on GameStop’s potential in e-commerce with a flawless reading of the market environment.

Nearly two months later, however, shorts aren’t really getting squeezed. Yes, GME has rallied again, gaining more than 400% from a Feb. 19 close just above $40. But there are no short sellers of size in the market who didn’t prepare for such a move.

They may have kept higher-than-usual dry powder behind the short, with the knowledge that the trade might require waiting out the army of buyers. They could have bought call options as a hedge, though the price of those hedges likely required alternative mitigating strategies in the options or equity markets.

Regardless, with short interest down and the cost to borrow now minimal, there’s little support for the short squeeze thesis going forward.

Instead, GME looks like something else – which probably isn’t a good thing for the bulls.

Is This a Gamma Squeeze?

For the January rallies in GME and other Reddit stocks, short squeezes were not the only driver. Koss (NASDAQ:KOSS) had exceedingly low short interest as late as mid-December; it only picked up when the stock suddenly soared at year-end. By the standards of the retail sector, shorts were relatively uninterested in Express (NYSE:EXPR).

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There were other factors at play. One appears to be a so-called gamma squeeze. A gamma squeeze starts with heavy buying of call options (bets that the price will go up) relative to put options (bets that the price will go down). In this scenario, market makers now are effectively short the underlying stock.

If GME, for example, moves higher, the call options the market maker has sold become more valuable. (In options greeks, “gamma” roughly speaking is the change in option value relative to changes in the price of the underlying.) And so the market maker buys the underlying stock to hedge. Adding fuel to the proverbial fire, the market maker buys more of the stock as the price moves higher. On the way up, the action looks almost like a perpetual motion machine.

Almost certainly, the January rally in AMC Entertainment (NYSE:AMC) was a gamma squeeze. Call option buying was massive, as I noted at the time.

Interestingly, that doesn’t quite appear to be the case for GME anymore. Put/call ratios across expirations generally lean toward the bearish side. That’s still not the case for AMC, for instance. Even for Tesla (NASDAQ:TSLA), another purported gamma squeeze beneficiary, options markets look more bullish.

What’s Driving GME Stock?

So if not’s a gamma squeeze and not really a short squeeze, what is keeping GME above $200?

One answer is that the fundamentals simply are that good. Chewy (NYSE:CHWY) co-founder Ryan Cohen still is on the board, and still leading GameStop’s digital transformation strategy. The new console cycle is beginning. As crazy as the GME rally has been, the stock still trades for less than 3x revenue when many other e-commerce companies trade at vastly higher multiples.

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Personally, I don’t believe in that thesis for a minute. Substantially all of GameStop’s current revenues are brick-and-mortar. E-commerce companies focused on single vertical are rarely successful, let alone worth $14 billion.

Nor do I believe enough traders believe in that thesis to keep GME above $200. While GME stock probably was too cheap at $5 given its digital opportunity, I have hard time believing enough investors see it as cheap with a stock price 40x as high.

The simplest answer might be that there’s just a stalemate right now. The ardent GME shareholders (or, more accurately, “hodlers”) aren’t going anywhere. The shorts crazy or brave enough to take the bearish side probably can hold their line. Those of us on the sidelines are unlikely, at this point, to go rushing into the fray.

That explanation is probably too simplistic. Share volume has dropped toward mid-January levels – but of course GME stock is massively more expensive. Dollar volume still is enormous, averaging in the range of $5 billion-plus daily so far this week (March 15 through March 17).

At the end of the day, perhaps GameStop stock has just turned into a game. It’s a battle of wills between bulls and bears. GME stock is above $200 for the simplest possible reason: a lot of people have bought it, and not many of them are yet willing to sell.

If that’s the case, GME comes down to who blinks first. With all due respect to WallStreetBets, it might be them.

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On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Read more from Vince Martin at InvestorPlace.com

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