The prevalence of option short squeezes is essentially a mirror image of the central bank’s excessive liquidity
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Longtao Global Macro (ID: WaterWisdoms)
The option short-squeeze method is essentially a mirror image of the central bank’s liquidity flood
We pointed out last year that after the Federal Reserve rescued the market, the US stock market has a tendency to become A-shares——
The trading volume and volatility of individual stocks are often abnormally enlarged, and the price deviates from the fundamentals for a long time. For example: Hertz, which is on the verge of bankruptcy, and the stock price of PPT company Nikola have risen 9-15 times in a short period of time, making rational value-oriented short-sellers come back with a feather. In order to resist Facebook’s Whatsapp modification of the privacy policy and commercialize user information, Elon Musk called on everyone to replace Whatsapp with Signal on Twitter. As a result, retail investors rushed into the wrong stock Signal Advance, causing the latter to rise nearly 20 times.
Low-quality small and mid-cap stocks, junk stocks are overvalued-the P/sales ratio of Russell 3000, the small and mid-cap that has been hit hardest by the epidemic, is close to the 2000 high.
Small and medium-cap stocks and junk stocks outperform blue-chip stocks and large-cap stocks.
On the whole, the U.S. stock market is moving towards the secular entertainment, junk stock revolution, market dream rate (ARK stock selection is typical), and the gold rush model of "people are stupid and rich".
Nikola who didn't build a car
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Signal Advance rose 20 times
These phenomena have never been seen in my 16 years of experience in studying US stocks, including various forms of bull market, bear market, rescue market, and shock market. The reason, I think there is a high probability that
This time, the central bank released not only a large amount of water, but also a very fast speed. The rapid flood of liquidity led to an increase in investors' risk appetite, and the general bubble overflowed in the market, which was easy to rise but hard to fall;
The U.S. government has made great efforts to rescue the market. I suspect that there is a high probability that some public offerings and hedge funds will be combined to give guidance on the rescue-Trump personally called several hedge fund giants at the end of March to consult their opinions on the economy;
The U.S. government issued a large amount of subsidies, residents’ savings increased, and the home office effect was superimposed, resulting in a surge in retail trading volume;
Valuation bubbles attract value short sellers, but the latter are squeezed short by the enthusiasm inspired by hot money;
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Source: Bloomberg
Source: Bloomberg
Beginning in the second quarter of 2020, small-cap stocks in U.S. stocks began to outperform the broader market. Reasons for the style reversal:
Increased risk appetite;
short position closing;
retail preferences.
Source: DailyShot
Source: Bloomberg
Source: Bloomberg
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GS's retail preference portfolio has continuously outperformed the world's most difficult benchmark - SP500 since the second quarter
The reason is probably that the portfolio positions are concentrated in:
growing up;
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
The opening of SP500 put options is close to the end of 4 years-the bullish sentiment is high, and there are fewer and fewer bearish people.
The most active 50 stock option trading volume catches up with SP500
Source: FT
Stock option trading volume rose sharply
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Moutai, Tesla, Weilai, Ideal, Xiaopeng, ARK, GameStop are essentially social stocks
There is also a new thing-community stock trading. Starting from Tesla, investors have formed a social group with high-frequency communication and high exposure to news and key words. They buy Tesla cars and stocks at the same time, which leads to the growth of Tesla’s sales and the accelerated rise of stock prices. They reinforce each other and form positive feedback to promote Tesla. profits and rising prices. (Of course, the growth of Tesla’s sales is largely due to China’s manufacturing industry chain and the hard work of the Chinese people. This incident is the starting point for the acceleration of Tesla’s stock price) —— This model is also similar to some Moutai investors while hoarding Moutai wine Spot, while buying Moutai stock, at the same time promote the profit and stock price of Moutai. NIO, Ideal, Xiaopeng's consumers/investors have successfully replicated the Moutai and Tesla models. Robinhood, followers of ARK's public positions, have similar characteristics in essence. These groups have actually formed a "social stock speculation" model, with strong group and consistent collective action characteristics-in fact, they are in a group with domestic public offering funds The patterns are similar - they all monopolize the stock liquidity in a short period of time, forming a short-squeeze effect.
Manipulation: Short squeezes in off-market markets
Last year, we discovered that some people in the market took advantage of the low liquidity in the after-hours and pre-market markets to manipulate stock prices—they rose sharply, leading to a gap in the opening of the next day and a direct short squeeze. According to the latest statistics from Goldman Sachs, the SP500 rebounded by more than 60% from the end of March last year, taking into account the gains from the off-market market. However, if the off-market market is excluded, the index only rebounded by about 10%. This phenomenon was rare in the past.
In my personal judgment, this method is generally highly likely to be done by institutions, and it is unlikely to be retail investors. Because in terms of crowd characteristics, the base of retail investors far exceeds the number of institutions, and there are not many institutions doing off-the-shelf markets—and the probability of differentiated retail investors trading off-the-shelf markets should be even smaller.
This time on GME, we observed a surge outside the market. For example, on 1.26, on Monday, the stock rose 50% before the market. It's hard to imagine that this was done by retail investors. And there have been at least three short-squeeze actions in the off-market market before.
GME
Previously, in the period of accelerated growth of domestic electric vehicles Weilai, Ideal, and Xiaopeng, most of the gains were also completed in the off-market market. Note that before the two big drops in November, these stocks all had a short squeeze in the off-market market, and then directly opened higher and moved lower the next day-the main funds achieved a smooth high distribution by manipulating the out-of-market market The suspicion is great.
Weilai, Ideal, Xiaopeng
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Manipulative tactics using options market short squeezes
In fact, GME’s method of using call options to squeeze short on small and medium-cap stocks has already existed in the A-share market a few years ago. I have communicated with the option self-operated department outside the securities market, and they have been trapped by domestic hot money and have been squeezed short.
The operation process of this method is generally as follows:
Institution A selects bid B, hoards a certain amount of chips at a low position, and slowly pushes them up;
Customize the call option with the option market maker C, the market maker receives the order, sells the call option to the buyer A, and starts to buy the underlying B to hedge the risk;
A continues to hoard chips, and even speeds up buying, pushing the target B to rise faster; C is also forced to keep buying B in order to dynamically hedge risks. The joint action of A and C caused B to rise more rapidly and enter a short-squeeze state;
Accelerated rising mode attracts trend traders to enter the market;
This approach, in theory, is the same as that of the hedge funds led by Soros during the Asian financial crisis: first hoarding index and foreign exchange long orders; then buying index and foreign exchange futures put options; finally selling index and foreign exchange futures in order to realize Detour profits on derivatives. Simple and brutal. So I think that Soros punctured the Asian financial bubble. Although there are many remarkable points in terms of economy, trading art, and philosophy, the specific method is not entirely the kind of exploiting the weakness of human nature. The state of "doing nothing"; on the contrary, it is a bit indiscriminate - relying on the advantages of funds and boosting through strong external forces.
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GME short squeeze is not exactly a retail short squeeze, but more like an institution fishing in troubled waters
We do not agree with the media simply summarizing the GME short squeeze phenomenon as a group of retail investors. Because a successful short squeeze involves:
Directly buy a large number of stocks to squeeze short;
Short squeeze in the off-market market;
Stocks of a similar pattern rallied simultaneously, exacerbating the short squeeze.
These are not like the tactics of retail investors without leaders, but the group army operations of large institutions.
At the beginning of September last year, FT and WSJ reported that Softbank invested US$4 billion in option premiums to buy first-line technology stocks, equivalent to a stock market value of more than US$30 billion. It can be seen that a large number of institutions are also using similar techniques to squeeze short positions.
It is not necessarily feasible to simply use options to squeeze short positions and push up stock prices through market makers hedging orders. Because short sellers will also focus on overvalued stock prices and enter the market to sell short. If there is a long-short balance or short-short victory, option buyers will lose money in both time and direction—the winning rate is even lower.
Source: Bloomberg
Source: Bloomberg
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Last Friday, the GME 60 strike price call option volume ranked first, more than SPY and AAPL.
In addition, as early as last Friday’s short-squeeze battle, we have discovered a group of stocks with long gamma and short-squeeze patterns, scattered in various industries, such as AMC (entertainment, epidemic exposure), PLTR (technology), BBBY (retail) , DDD (technology), BILI (social media), NIO (new energy vehicles), BYND (food), these stocks have very little in common in terms of industry, style, and commonality—except for high valuations. But on Friday, those stocks rose almost simultaneously, while the SP500 and NASDAQ fell over the same period. Stocks without correlation, resonating, and short-squeezing at the same time-I find it hard to believe that this is an unorganized, undisciplined, and unstrategic army of retail investors.
Personally, I am more inclined, this is some institutions that have data on the capital flow of stocks and options, taking advantage of the herd characteristics of retail investors, mixing with the army of retail investors, blowing the charge at key positions, and leveraging (retail investors, market makers, short sellers) to fight force (short).
How many successful peasant uprisings have there been in history?
Chen Sheng, Wu Guang, Red Eyebrow Army, Yellow Turban Army, Huang Chao, Li Zicheng, Taiping Heavenly Kingdom?
Successful peasant uprisings all benefited from the participation of the landlord class, intellectuals and warlords—Xiang Yu, Liu Bang, Liu Xiu, Zhu Yuanzhang...
The U.S. Securities Regulatory Commission condoned various market manipulation tactics to squeeze short positions, which is a bit like Empress Dowager Cixi borrowing Yihe Tuan to support the Qing Dynasty and destroy foreign countries—— Target: support the market.
We predict that in the short term, as the Democratic government increases subsidies, retail investors may continue to squeeze shorts; however, in the long run, as the central bank shrinks liquidity in the future, this phenomenon of distorting value investment and disrupting the resource allocation function of the financial market is estimated will gradually decrease.
Crooked ways cannot become a long-term winning weapon. According to FT reports, in November last year, Softbank recorded a loss of US$2.7 billion in the final liquidation of option positions-assuming that the principal of US$4 billion reported in September did not increase, the loss reached 67.5%. What's more interesting is that FANG turned around and fell immediately after the report in September, and started to rise again after the report in November...
