Were GME Shorts covering between Jan 22 and Jan 27?
Hey guys, here's my attempt at a DD for determining whether shorts were actually covering between Jan 22 and Jan 27.
Disclaimer: This is not financial advise. Do your own DD before making any decisions. I am not a financial advisor. I'm just a guy.
Why does this matter?
Majority of sources of the latest short interest data indicates that the open short interest by Jan 29 was 21.4M shares. This means that between Jan 15 and Jan 29, 40.4M shares were covered. I won't dive into this math since there are several other posts that explain this. Below is just one:
We know for a fact that there are ways to circumvent the SEC short reporting guidelines via the strategy of synthetic longs/options. This has also been explained by other posts and even confirmed by the SEC in a memo, see below:
https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf
40.4M shares is A LOT of shares to cover. Is it possible? In a vacuum, sure. But let's take a look at the data.
The Data
With respect to options, everyone has been looking at the weird number of 800C options. There's good reason to. Cheap calls could be a way for HF's to hedge against their short position. The problem with looking at this data between 01/22-01/27, is that it's also likely that the average ape may have picked up cheap options in light of the stock price rising. Therefore, it would be hard to discern how much of the HFs are hedging vs the average ape buying shares.
We also know via the SEC memo above that a HF that is short can write a call option to make it seem like they've covered. From what I understand these calls would need to be ITM in order for that to be possible. This is also hard to analyze for the same reason as analyzing the 800C options. A slightly less retarded may be holding onto call options that were purchased from Sept all the way to Jan.
What I want to look at, is the put options with really low strike prices (<$5). Why?
- Because we also know via the SEC memo that a married put accomplishes the same thing as writing a call. (I.e. it creates a synthetic long, making it look like your short position is gone).
- Between 01/22 - 01/27, the stock price had 3 green days going from $65.01 to $347.51. If you're buying a put with a really low strike, you're essentially betting on GME going bankrupt (i.e. the same thing a short is betting on).
What I specifically wanted to look at was the day-to-day change in open interest of puts <$5 from 01/22 - 01/27.
Definitions for Retards:
Open interest is the total number of outstanding derivative contracts, such as options or futures that have not been settled for an asset.
From <https://www.investopedia.com/terms/o/openinterest.asp>
Therefore if the open interest on a contract increases day-to-day it means that there were more positions opened.
I got the historical options data from MarketChameleon. See image below.
We can see that on Jan 22, there was an open interest of 1228 contracts of puts with strike prices <$5 (Expiring between Jan 29 and Mar 19).
By the close of Jan 27, the open interest on these contracts had grown to 95,543.
Interpretation
My hypothesis is that the only party that would want these puts at a time when the stock price went from $65 to $347.50 are HFs. Why?
- They are cheap. The premiums on these contracts were super small (<$1)
- It helps create a synthetic long position which can be used to make it appear as if short's covered.
- Take a step back: What logical reason would there be for anyone long on GME to buy a $5 strike Put, when it's currently trading at $65+? It makes ZERO sense.
The change in open interest of puts <$5 between Jan 22 and Jan 27 was 94,315. This means 9.43M Shares out of the 40.4M shares that we are led to believe covered could not be actual covering. Keep in mind also, this is a conservative estimate. We're not accounting for the shares that were covered via selling calls (also the same as synthetic longs). I'm also not including the data from Jan28-Jan29 to be conservative, because I'm not sure if the short interest reports includes trades up to Jan29. (Jan 29 is settlement date, which is T+2 from Jan 27). If I'm just being conservative, then theoretically, we could include the puts from Jan28 - Jan29 which would further increase the number.
Conclusion
While it's likely that shorts did cover some positions from 01/22 - 01/27, there's 9.4M shares of put contracts that don't make any sense. It's very likely that the short interest covered between Jan15 and Jan29 is LESS than the 40.4M shares. This would imply that the current number of shares shorted is higher than what's actually being reported.
If we used a float of 27M shares, this works out to short interest % of 113%. If we used a float of 46.9M shares, then the short interest % is at least 65.7%.
TLDR: HFs didn't cover completely. Used schemes (buying cheap puts at really low strike prices) to make it look like they covered 40.4M shares, but in reality it's very likely less. HOLD GME TO THE MOON. ✋💎🤚 🚀🚀🚀🚀🚀🚀
Disclaimer: This is not financial advise. Do your own DD before making any decisions. I am not a financial advisor. I'm just a guy.
Posted Feb 12, 2021, 9:41 AM UTC