GameStop Mania Fueled by Record Options and White-Knuckle Shorts

(Bloomberg) -- Frenetic options trading. A sea of shares sold short. Chat room range wars. Pretty much everything with the potential to slingshot a stock into the stratosphere was at play in GameStop Corp. Friday.

“GameStop is a true animal,” said Steve Sosnick, chief strategist at Interactive Brokers. “It’s a rare convergence of a short squeeze combined with some fundamental news and an army of fast money traders.”

If any single fact explains the histrionics, it’s this: GameStop stock equal to 141% of its available shares has been borrowed and sold short, a bearish position showing mark-to-market losses of over $1.74 billion, according to data from financial analytics firm S3 Partners. (A single share can be shorted multiple times.) Gains beget gains when shorts are under that kind of pressure, forcing them to buy back stock as it rises.

In the options market, where dealer hedging also has the potential to fuel rallies, a record 913,000 GameStop calls traded as of 3:43 p.m. on Friday, as a showdown between short-seller Citron Research and hordes of Reddit day traders ended with the stock soaring as much as 79%. A bullish GameStop contract with a strike price of $60 expiring Friday was the most actively traded option across exchanges, according to Bloomberg data. It jumped 2,700% to roughly $1.97, from just $0.07 on Thursday.

GameStop’s brick-and-mortar, often mall-based presence has made it a favorite among short sellers for years -- it has rarely left the list of their top targets on the New York Stock Exchange. That, along with its relatively small float, made it tempting for crowd-sourced chat-room cadres who naturally glom to shares trading in the single-dollars.

Which GameStop used to do, but does no longer. At $57, the stock now trades for 50 times annual earnings in the next year analysts forecast it will be profitable -- its fiscal 2023. But trading heated up Friday, with more than 175 million shares changing hands during the session, 21 times the daily average of the past year.

The GameStop frenzy comes after a Tuesday tweet by Citron, in which the short seller wrote that “buyers at these levels are the suckers at this poker game.” That spurred a wave of backlash of the 1.9 million-member-strong Reddit forum r/wallstreetbets, prompting Citron managing partner Andrew Left to say Friday that the firm will stop commenting on the stock.

Amid the battle, GameStop surged as much as 116% this week, with Friday’s surge triggering a trading halt for the stock and marking its most volatile 10-day period on record. Shares have rocketed over 200% higher so far this month.

Traders are also chasing those gains in the options market, according to Susquehanna International Group’s Chris Murphy.

“It’s an epic combination of retail traders chasing momentum on a highly shorted stock,” said Murphy, the firm’s co-head of derivatives strategy. “Those investors may be viewing the January $60 calls for a max loss of about $2 as a better way to express their opinion than buying the stock for $58.”

©2021 Bloomberg L.P.