The return of GameStop stock mania was weeks in the making
Options traders were making wild bets on GME much earlier in May
The return of the meme stock mania that’s seen shares of GameStop rise as much as 270% over the past two days was shaped by bullish bets that were weeks in the making. And if those wagers were ever going to pay off, the surge needed to happen by this specific time.
With hindsight, trading volumes in the stock were picking up for no good reason well ahead of this week. These higher volumes were accompanied by some eyebrow-raising behavior in the options market.
Daily trading volume ranged from 2.1 million to 7.7 million over the last three months, besides a few days in late March where it briefly jumped to 17 million shares. But then things started changing: on May 3, volume spiked to 36.3 million shares, and between 24 million and 48 million shares changed hands each day until May 13, when volume spiked to 182 million. Speculators were accumulating shares in the week leading up to Roaring Kitty's tweet.
“Frankly, I’ve been trading this for the past two weeks in both directions because something has been percolating,” said Tom Hearden, senior trader at Skylands Capital.
Steve Sosnick, chief strategist at Interactive Brokers, flagged a noteworthy dynamic at play in options markets ahead of this week’s rally in GameStop: bullish bets on where the stock would be by May 17, the end of this week, were skewed towards lotto-ticket, moonshot outcomes.
That is, people were buying more options that would be in-the-money if GameStop shares rose more than 150%, compared to those that would be in the money if the stock only rose 35%. Prior to this week, the only times GameStop had rallied more than 100% over a 10-day period was the meme stock frenzy in Q1 2021 and the much fainter echo that followed one year later.
Typically, you would expect interest in upside targets that would be easier to reach to become more in demand during the stock’s gradual rise, Sosnick said.
“This has been building for some time, someone got long big slugs of the $25 and $30 calls,” said Sosnick. “The fact that we saw the open interest creeping higher and steadily increased in the 30s faster than in the 20s, was odd, and a signal that something was up.”
Those call options, barring a repeat of the Q1 2021 and 2022 episodes, would have expired completely worthless. As of Friday, the ability to buy shares of GameStop by May 17 at a price of $30 was worth $0.43. Now, those options are worth over $20.
Compare those trends in open interest to a much larger, heavily-traded stock like Apple. Coming into the week, there was more than five times as much open interest in options that would be in the money in the event of a 4% increase in the iPhone maker compared to options with a strike price about 15% above the market close on May 17.
