Jerad

If you open Twitter or even any large financial media outlet, it seems like all anyone can talk about is @TheRoaringKitty and $GME. I get it, the guy has a 9 figure trade on right now and it’s interesting. But how can you make money from this trend? If we take a look at the original frenzy in 2021, it might provide some clues. Here’s how $GME looks through the lens of a vol seller. In the last few weeks, I’ve seen a large influx of newer option traders start their journey due to RK’s $200M call lot. The google search term “options trading basics” is up 500%, while CBOE’s daily option volumes are anywhere from 5-10% higher with a clear outpace of calls to puts. With this new elevated interest comes cringe-level worthy advice saying to buy calls because the stock will go up. Any seasoned vol trader knows this is completely wrong, and right now the newer and more casual option traders are learning first hand how important derivative pricing can be. Right before RK’s livestream, the ImpliedVol on the 6/7/24 expiry calls were trading anywhere from 1,200%-1,500%. This was implying an astonishing 101% daily move! For those newer option traders who might not know what Implied volatility is, think of it as inherently supply and demand. As RK turned on the stream and folks had high expectations of him to say something new, when he didn’t, the stock fell lower as it was never going to realize 101% in a day. It was already priced in. As a side note, could you imagine going to work on Friday and your boss telling you that you must tune into the stream because whatever he says is going to move $millions in PnL of your desk. LOL! Back to 2021 when the original pump was going on, 1YR vol traded at 210+, implying 13% daily moves every day for the next year. This is quite nuts and shorting that vol was one fantastic trade. The problem was that participants shorted this vol too early at like 150 and thought it couldn’t go any higher while getting blown out in the process. The key point during that time was waiting for the vol to start to head lower before pouncing. Why? I’ll give you a simple example. Think of yourself standing at the Costco checkout line on Black Friday. There’s 10 cash registers in total but only 7 of them are currently being used. More employees clock in for the day and open those remaining 3 cash registers. What do you think the people in front of you will do? They will flock to those open cash registers as quickly as possible. This is “vol crush” at work. But until those employees open the new cash registers, the line behind you will get longer and longer. Hence, this is why you hammer the trade only when the vol actually starts coming down. Kitty’s 6/21/24 20c is trading at a 231% IV which implies roughly 14% daily moves until they expire. Sure the stock can see a few +/- 14% days but the question to ask is if it’s sustainable? Given the constant media attention, I’d like to assume that vol will stay relatively constant until those calls expire. No matter what theos your model prices, I wouldn’t want to be short longer dated vol until after 6/21. There will likely be some price-insensitive buyers at that 200 vol. I believe the real longer dated vol trade comes after 6/21. 1YR vol currently trades at 130 while transactions costs/requirements are high. Lastly, I’ve seen some quite horrendous takes on the market making side of things. First of all, the dealers providing the liquidity to the $GME folks now have 3+ years of experience dealing with a frenzy like this. MMs are prepared and far better equipped nowadays to handle this. They hired some of the most decorated math Olympiads to build out new models and "Jimmy from TikTok" on his first week of options trading is saying they are screwed. I just want to give some context here. Sure they could lose out on a portion of Kitty’s trade but at the end of the day, they will make money from intraday trades or other end of day models that they utilize. Take for example the initial May pump. Spreads were so wide, even up to $2, and you could get filled at .5-.20 with great liquidity on these arbs. Regardless, when MMs know a certain type of flow is coming (buys), that’s an edge and a large one in fact. I should state here that I don’t take any directional view on the stock. If it goes up or down then great, I’m looking to make money, just like you. Overall I’m not really sure how this saga will end, but I find it incredibly fascinating through the derivs landscape. It likely won’t settle down until those June 21st calls expire. Until then, there will always be opportunities until the history books call it. Cheers🍻