Under the leadership of Keith Gill, the big brother of meme stocks (code name "Roaring Kitty"), a transaction screenshot became the "ammunition" that boosted the stock price of GameStop, and caused a significant increase yesterday. However, two bearish news followed, which quickly cooled down the speculation. Can Keith Gill lead GameStop to make a comeback?

How did two famous investors use options to make a profit in this round of meme stocks frenzy?

Earned $78.6 million overnight, but Keith Gill is in a difficult position.

Yesterday, Keith Gill, the big brother of meme stocks (code name "Roaring Kitty"), posted a delivery order screenshot on his Reddit account "DeepF-Value". Compared with the previous day, Keith Gill's holding position in GameStop did not change, still 5 million shares and 120,000 call options.

However, after GameStop rose 21% on Monday, Keith Gill's stock position profit was 31.62%, and the call option profit was 76.04%. The cumulative floating profit of the two was as high as US$78.6 million, which made Keith Gill's holding value soar to US$289 million, but he did not cash out.

According to the latest data from the options data platform unusualwhales overnight, the overall stability of options trading, and the open interest did not show any significant changes compared to the previous trading day; the intraday increase once approached 300%, and finally closed up more than 83%.

On May 13, Keith Gill returned to social media as "Roaring Kitty" and hinted at his return with an emoticon, instantly igniting the madness of meme stocks that had been gone for three years. However, important meme stocks such as GameStop and AMC Entertainment are no longer as glorious as they used to be. After GameStop surged to more than $60 on May 14, it lost its momentum and continued to hover around $20.

It is worth noting that Bloomberg reported on May 15 that this round of meme stock frenzy lacks a key ingredient-the buying frenzy of call options. The report pointed out that in 2021, due to the market's massive buying of call options for meme stocks, the market makers who sold these call options were forced to buy stocks for hedging, which led to the rapid surge in stock prices. However, the trading volume of call options for GME in May was only 25% of the peak in 2021, which was not enough to trigger a "short squeeze".

Currently, under the leadership of Keith Gill, the overall trading of GameStop's options has expanded.The latest data on Monday shows that GameStop's option trading volume is 900,000 contracts, an increase of about 30% from May 13; the open interest is 1.06 million contracts, an increase of about 60% from May 13.Source: Futubull-Stock Quote Page-Option-Option Analysis

Source: Reddit

Option traders taking the opportunity to make a profit? Duan Yongping and the bond king came to join in.

Option traders choose the timing to arbitrage? Both Duan Yongping and the Bond King arrived as soon as they heard the news.

As the focus of the US stock market, the meme stock craze has also attracted the attention of many famous investors, including Bill Gross, a legendary figure on Wall Street and known as the "Old Bond King", and Duan Yongping, known as the "Chinese Buffett". They both took alternative approaches and used options strategies for arbitrage.

Bill Gross mainly profits from "shorting volatility". Volatility is an indicator reflecting uncertainty. When market uncertainty increases, volatility also increases; when market uncertainty decreases, volatility decreases. Bill Gross believes that the market overestimates the possibility of GME and AMC stock prices experiencing large short-term fluctuations.

In a tweet Bill Gross released on May 14, he stated that his strategy was to "short 400% annualized volatility". According to Bloomberg, on Tuesday, May 14th, he sold both call and put options of GameStop at $40, forming an options combination called "out-of-the-money straddle", betting that the stock price would stay within a certain range during a certain period of time rather than experiencing a one-sided movement. If the price of GameStop's stock stayed between $18 and $62 that week, he could collect $22 of option premium from each straddle.

After reaching a high of $64.83 on May 14th, GameStop did not experience significant changes. Testing the option data of GameStop from May 14th to May 17th, the implied volatility of the stock dropped from 306% to 232%. At the same time, the stock price fluctuated between $19.7 and $43 during that week, closing at $22.21 on May 17th (Friday of that week). Bill Gross is likely to successfully profit from this strategy.

The implied volatility of GME rose again to 226.11% on Monday, up 69.78%, also at a relatively high level this year.

Another well-known investor, Duan Yongping, displayed a screenshot of his GameStop options trades on an investment forum yesterday. He did not directly short GameStop, but sold 100 call options with a high strike price of $100 that will expire on January 17, 2025, involving $49,000.

This kind of call option trading behavior is called "selling naked call", also known as "selling uncovered call options" or naked options. It means that in the absence of the underlying securities, which means that Duan Yongping does not hold GameStop stocks, he sold call options and collected a certain amount of premiums from the counterparties.

Unless the crazy rise of the game stop stock can continue until early next year and the stock price soars above $100, Duan Yongping may not exercise the option. Duan Yongping will only lose money if the game stop reaches about $105.

Back in the meme stock long-short battle of 2021, Duan Yongping performed this kind of options arbitrage. At that time, Duan Yongping sold 100 call options of GameStop with a strike price of $800 (equivalent to 10,000 shares of stock). Calculated at a premium of $40 per share, Duan earned more than $400,000 from that single transaction.

Of course, selling naked calls comes with strong investment risks. If GameStop rises rapidly in the short term, investors who sell naked calls may bear unlimited risks. Duan Yongping also stated that this short-term operation is not an investment, but a "small gambling", and repeatedly reminded fans in his own comment section: high-risk operation, do not imitate.

In general, the "sell covered call" operation for holding stocks can better hedge investment risks. In the case of holding spot goods, even if the stock price rises to $100 and causes losses due to counterparty exercise, the losses will be offset by the increase in the held stocks.

Editor/new