Roaring Kitty’s $240 million problem
The account is a whale in a position in which there are few natural buyers.
What do you do when your like for a stock exceeds the money you have to spend on it?
That’s the position DeepFuckingValue, aka Keith Gill, aka Roaring Kitty may find themselves in right now.
Don’t get me wrong: this is an amazing problem to have.
A screenshot posted to the Superstonk subreddit on Sunday evening by the account associated with Keith Gill revealed a stock and options position in GameStop of roughly $180 million, along with about $30 million in cash. In other words, $210 million more than most of us.
Boilerplate disclosure: We don’t know if the positioning in this screenshot is accurate. But let’s proceed as if it is, for fun.
Those 120,000 call options give their holder the ability to purchase 12 million shares of GameStop at a strike price of $20 (C20s). The issue is…exercising your right to do so would cost $240 million. And, as of 2:00pm ET, the value of the stock position and cash only amounts to about $185 million.
Another problem with those options: none of DeepFuckingValue’s most zealous followers would want to take them off his hands.
They’re no longer YOLO bets; the options are very solidly in-the-money (because the stock trades above $20). Options that are out-of-the-money have far more potential for explosive upside moves than in-the-money options as the underlying stock price rises. For example, the in-the-money C20s that expire on June 21 rose as much as 285% today; the out-of-the-money C50s rose as much as 490%. The volume stats back this up: As of ~2:10 pm ET, about 7,500 of the C20s changed hands on Monday, compared to 9,000 for the C30s and 16,700 for the C40s.
The account is a whale in a position in which there are few natural buyers — it holds about 83% of the open interest in aggregate heading into Monday’s session.
If no activity happened between now and the June 21 expiry, there is a risk that the brokerage (E-Trade, by the looks of it) would be forced to step in and sell off some of the account’s options (to the extent market makers are willing to buy them). If buyers cannot be found, this may result in the money-good options expiring worthless if there isn’t enough cash and margin available to exercise them.
Per E-Trade (emphasis added)::
E*TRADE reserves the right to liquidate or cover expiring option positions which would result in undue risk and/or margin deficit related to exercise or assignment.
Accounts with insufficient equity on hand prior to exercise or assignment are subject to unwarranted risk of adverse price change in the underlying security upon delivery. To protect against the excessive risk of an adverse movement in the underlying security, E*TRADE may intervene to mitigate the risk on your behalf. Such intervention may include closing out existing positions, buying, or selling stock against expected exercises or assignments, or entering “Do Not Exercise” instructions for positions expiring in-the-money. Any losses incurred from actions taken to mitigate risk are the sole responsibility of the account holder.
Obviously, if you’re option-rich and cash-poor (relatively speaking), this is the kind of outcome you’d like to avoid. But how?
Well, one could simply look to sell the options over the next few weeks as they approach expiry. In theory, this sounds easy. In practice, again, this looks to be an account with an extremely dominant position in one particular option and a seeming inability to exercise said option contracts. So, that road might be a bumpy one — but still, one almost certainly worth pursuing. We’ll be checking on the open interest in that contract tomorrow morning to see whether that process is starting to play out.
But another deliciously ironic way of navigating this conundrum was suggested by Steve Sosnick, chief strategist at Interactive Brokers: DeepFuckingValue would need to sell shares of GameStop short.
“Whoever holds this would be nuts if they’re not monetizing that position,” he said. “Standard operating procedure when looking at a profit this big involving options is to either sell the options, or, if they are deeply in-the-money, to sell the stock short.”
The sequencing would go a little something like this:
From a starting point of 5 million shares and 120,000 options contracts, sell all of those shares (very possible) and what you can of the options (not that much) during the surge this morning. There is much, much more liquidity in the stock than the C20s.
Then, go beyond that by selling shares of GameStop short — roughly 10 million shares’ worth — to neutralize the long position embedded in your in-the-money options. That locks in the profit made this morning.
As you continue to monetize the options position in the days ahead, you can correspondingly lighten up on the short bet. Then, at the time of expiry, if the shares are still above $20, you can exercise the options and have that stock cancel out your short sales.
The position could be structured in a number of different ways to still leave an overall bullish tilt on GameStop, rather than fully neutralizing the exposure.
Who really knows what’s happening here. But it’s hilarious to imagine that, in acting in their own self-interest, DeepFuckingValue might be well-served by doing what catalyzed legions of retail investors to get long in the first place: becoming a whale shorting shares of GameStop. Even if it’s more of a trading accounting gimmick than him no longer "liking the stock."
