To The Moon

$GameStop(GME)$ :Verifies an Old Saying: The Craftiest Hunters Disguise Themselves as Prey

The Moment to Hunt

Today, I saw a comment under GME that someone's out-of-the-money call that they sold got assigned. This unconventional assignment made me smell the scent of the old whales again.

This friend discovered a new short stock position in their account, which turned out to be from the $19.5 strike call they sold last week getting assigned.

Interestingly, on May 24th, GME closed at $19.00, making those $19.5 calls out-of-the-money. But the stock price got dragged up to $23.4 after-hours, rendering those calls in-the-money based on after-hours pricing.

This leads us to conclude: Someone conducted a massive exercise of calls during the after-hours ramp up in price.

You may ask, can options really be exercised after-hours? Yes, there is typically a 1.5 hour exercise window permitted post-market close.

Call Sellers' Enviable Profits

GME's first meme-rally got cut short before hitting the $400 target, but ever since, its implied volatility has remained elevated. The at-the-money calls expiring on May 31st reached a whopping 270% implied volatility.

The lack of fundamental support coupled with high volatility has turned GME into a call seller's paradise.

Some pursued this opportunity prudently, while others got greedy with strike selection.

The most conservative sellers opted for the highest $128 strike calls. With a minuscule 0.029 delta, the implied vol on these deep out-of-the-money calls reached an insane 786.74%, translating to an annualized yield of 64.84% for sellers.

This textbook risk-free arbitrage attracted droves of capital, with a staggering 31,700 open interest in these strikes.

Many others sought to maximize profits by selling at-the-money strikes closer to the stock price, not overthinking the mechanics but simply following their intuition to the highest premium available at the money.

Understandably, the at-the-money 5/24 $20 calls saw 33,700 contracts traded with 14,061 contracts in open interest the prior day.

Lured Into the Trap

After a week of choppy consolidation, and even a 13% plunge on Thursday, it was no surprise to see call sellers piling in on Friday. With Nvidia capturing most of the spotlight that day, the largely ignored GME seemed destined to close the week under $20 given the ranging price action.

But then the irrational happened - GME rallied 22% after-hours, spiking as high as $23.4. More shockingly, scores of out-of-the-money call sellers by the day's close got unexpectedly assigned on their positions.

Come Tuesday's open, these call sellers found themselves bag-holding newly acquired short stock positions as GME gapped up, likely dumbfounded.

Those bold enough to sell at-the-money options are either seasoned veterans or naive rookies who haven't blown up enough accounts yet.

How would rookies react after getting assigned? Would they recall the ramp up from the week of May 13th, when GME jumped from $23 pre-market to an intraday high of $64? How might they position following such an event?

So whether Tuesday's squeeze was an orchestrated ramp by the whales or just panic-buying from trapped call sellers, I'll feign ignorance for now.

If I were a whale, I'd keep this game going - engineer another big drop on Thursday, have Friday range, continue luring in new naive call sellers, only to forcefully assign them after-hours again.

Call sellers on meme stocks better not get too greedy chasing that last delta of premium - it's not worth falling into the trap.

The worst case scenario is - how much of your capital is already in the hands of your counterparty?

How does one maintain discipline trading meme stocks? Seasoned vets don't need to check themselves - they simply sell far out-of-the-money strikes like the $128 or $50 to avoid assignment risk.

For newbies, it's simple - ask yourself what's the max margin requirement if this trade goes against you?

Option sellers never have defined max loss - that's the tradeoff for selling premium.

Facing meme stocks, rookies better not be sellers, you'll likely get chewed up unable to withstand downsides. Just stick to trading normal tech names like Nvidia, Tesla, Apple.

• With shares, max loss = stock price

• With calls, max loss = premium paid

• With sold calls, max loss = theoretically infinite if assigned

If I was on the short side getting squeezed this week, I'd have two strategies:

1) The whales got me, take my lumps and exit to minimize damage;

2) These punks aren't done yet, they'll try to trap more sellers - don't panic sell, hold through the week to see if another flush comes to exit more favorably.