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The Market’s Prion Disease Returns

The Market’s Prion Disease Returns

Posted May 13, 2024 at 11:30 am
Steve Sosnick
Interactive Brokers

Prion diseases, of which “mad cow” is the best known, are thankfully quite rare in humans.  However, for better or worse, the market’s version – the meme stock trade — recurs periodically. 

As I type this, GameStop (GME) is up about 70% today and several other speculative darlings are showing double-digit gains.  Why?  Because a popular meme account posted a cryptic message on X (fka Twitter) after three years of silence.  The crazy part is that within the cadre of traders who get involved in these names, this makes perfect sense.

It makes even more sense if we look at how GME options traded during the past weeks.   These options are normally active, but there were notable increases in the volumes and open interest of upside call options expiring this Friday over recent sessions.  Something started brewing late last month, and it has continued through today.

GME Prices, volumes and open interests for selected call options expiring May 17, 2024

Sources: Interactive Brokers, Bloomberg

To be fair, it is typical for volumes and open interests to increase as the days progress.  The progress that we saw in the $20 calls is relatively normal, especially for a stock that had been steadily rising during the time period shown. 

GME 3-Weeks, 10-Minute Candles

GME 3-Weeks, 10-Minute Candles

Source: Interactive Brokers

Stealth rally anyone?  The stock was already up about 70% in the three weeks before today.  But that uptrend doesn’t fully explain why we saw such an explosion in open interest in options that would require another similar sized move during this week to pay off. 

A suspicious person might wonder why “Roaring Kitty” chose to return to social media today.  Given my past experience in analyzing the periodic bouts of meme stock activity, consider me suspicious.

In August 2022, there was a huge run-up in Bed, Bath & Beyond shares (the symbol was BBBY – it no longer exists).  The stock rallied sharply on a filing showing big purchases by then-insider Ryan Cohen – not coincidentally, the Chairman, President, and CEO of GME – and then fell sharply when it was revealed that he sold into the run-up.  We wrote two pieces explaining the activity, entitled “If You Can’t Spot the Sucker…” and “If You Can’t Spot the Sucker: Part 2”.  What occurred was legal, if unsavory. 

I’m sorry, but I can’t shake the feeling that something similar is occurring today, except that a social media darling is under no obligation to file insider activity with the SEC – he is not an insider.  In both cases, nothing specific was said about the stocks.  The SEC filings in BBBY were boilerplate, and the social media post literally had no words.   So, it’s probably all legal, but someone played this beautifully.

Also in August 2022, we wrote the following:

“We noted during a previous meme stock bloom that the half-life of these flourishes seems to be shrinking.  If you participate in these period[ic] rallies and trade them profitably, congratulations.  If you notice the eruptions only after they are in full flourish, please be careful.”  This was a profitable play for many and treacherous for many more.  But it has returned once again, only with shorter opportunities for outsized profits.

Truthfully, I have no idea how long this flurry will last.  I’ll guess it will be in play longer than the two-day wonder in BBBY that we wrote about, since there will be no filings to tell us when those who catalyzed the move have sold.   If you caught the move early, congratulations.  If you’re jumping in now, when literally nothing has changed regarding the fundamentals of GME, AMC, KOSS and others, remember the adage, “if you can’t spot the sucker at the poker table, it’s probably you.”

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3 thoughts on “The Market’s Prion Disease Returns”

  • John Titor

    Looking for a couple day pull back before CPI. Something feels broke. The market always pumps the garbage when there is nothing left to buy. I doubt GME gets a replay of the last pump. Overbought!

  • R in Brooklyn

    Stock manipulation is illegal. Period. Using social media to manipulate a stock price is conspiracy, is it not? Why is this still being allowed?

  • R in Brooklyn

    It’s up after hours, would not be surprised if additional, higher strike prices were added tomorrow, and whenever higher strike prices are added, the stock usually gets another boost, at least in the short term.
    We’ve seen that several times with Nvidia, which now has strikes up to $1940, which would equate to a market cap of almost $5 Trillion (!!!) All NVDA call options above $1600 are a lock to expire worthless.

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