The nihilism of r/wallstreetbets

https://www.youtube.com/watch?v=w2euIWm6Ch4&t=1m15s

No, it's the same retail people trading in and out. Someone w/ $100 in buying power can generate $2000 in traded value pretty easily just buying & selling 20 times, which some retail people do because they don't know what they're doing.

There's also going to be HFT market makers flipping their position and taking the other side, which almost doubles the volume compared to what it would be if there were no MMs. It's not a capital intensive business and they can trade huge volumes with very small capital.

Then there's going to be GME options market makers who are getting gamma squeezed and hedging their deltas. That would explain a bit.

The hedge funds getting squeezed explain about ~30m of the volume (assumption that 50% of the short float got squeezed), or perhaps more if they covered their position yesterday and decided to put it back on today.

Probably also some totally new hedge funds coming in today with a short as well, although that won't explain much volume since the entire float was shorted (and them some, due to naked shorting) and naked shorting is technically not allowed.

I'm sure all the prop firms were all over it today, as well, and they're going to be in and out with up to $1m positions.

Matt Levine wrote about this in his Money Stuff newsletter today. I highly recommend the newsletter.

In summary, the options have an amplifying effect on the total volume because of the hedging by market makers. Pair it up with a meme stock, and you have a lot of weird stuff happening all at once.

Primarily explained in the 2nd paragraph, but setup in the 1st paragraph.

"Second, a lot of people (on Reddit) who like GameStop don’t buy stock; they buy call options. If you are a retail trader looking to gamble on a stock, you can buy call options to get leveraged exposure to the stock. For instance, last Tuesday (Jan. 19), you could have bought a $50-strike call option on 100 shares of GameStop stock expiring this coming Friday (Jan. 29). Bloomberg tells me this option would have cost you about $3.35 per share, or about $335 for a 100-share option contract; the stock closed that day at $39.36. If you sold the options on Friday (Jan. 22), when the stock closed at $65.01, they were worth $18.16 per share. 4 You put in $335 and got back $1,816; you made a 442% return in four days. If you had just bought 100 shares of stock instead, you would have had to put in $3,936 to get back $6,501, a 65% return. Of course if the stock had stayed flat instead of going up to $65.01, you’d have lost 0% by buying shares and 100% by buying the options. So options are great if you have a relatively small amount of money and want to take a lot of risk with it. If, for instance, you are a retail trader on WallStreetBets."

"Meanwhile the market maker who sold you the options would have hedged its option exposure by buying about 40 shares of GameStop stock, for about $1,575. (This—the fraction of the underlying shares that the market maker buys to hedge the option—is called “delta.” 5 ) Your $335 of option premium caused $1,575 of stock buying. More important, as the stock goes up, the market maker will adjust its hedge by buying more stock—by the end of the day on Friday, the market maker would have owned about 80 shares. (The change in delta as the stock price changes is called “gamma,” and people who like this sort of technical explanation love talking about “gamma.” 6 ) You haven’t done anything else—you bought the options on Tuesday, and then stopped trading—but the market maker kept buying hundreds of dollars more stock as the stock went up to keep the option hedged. 7 Multiply that by the extreme popularity of GameStop options, and you get a lot of stock being bought as the price goes up—which, of course, pushes the price up more."

[1] https://www.bloomberg.com/opinion/articles/2021-01-25/the-ga...