TLRY, FSR, and the band plays on

The great gamma squeeze plays continue. Stocks like AMC and GME are still restricted … I saw a decent number of short dated call options contracts flooding AMC last week, so I tried to get in on the action. I bought AMC end-of-day Tuesday figuring that the big players would try to flood sales into the close and I could get a good price. Then on Wednesday morning when the retail traders flood calls I was going to sell end-of-week covered calls and pick up some premium. Alas, it didn’t work; my Ameritrade account would not allow me to sell covered calls in AMC as it was still a restricted security. That didn’t bode well for a gamma squeeze play, so I dumped the stock at a $0.09/share loss.

Later in the week I saw this fabulous chart:

Apparently the WSB crowd (and whatever hedge funds drive it) has moved on to other names, pushing pot stocks to the skies last week with the main focus on TLRY. The question then became which stock would they pump next week? It is often difficult for me to figure out because I don’t have any fancy screeners and I work during the day, but the great Lily of NOPE @nope_its_lily Nope, it’s Lily – Medium mentioned in a tweet on Friday that FSR was getting gamma bombed. She is a young college student who made a big splash with her work on how options contract can distort the underlying markets, followed by interviews with the greats on Real Vision, Bloomberg and others. Anyway, back to FSR:

I highlighted above what it looks like when a stock is “gamma bombed”. It basically means that the shortest dated call options contracts were purchased in huge numbers. The options dealers who sell those contracts are effectively short the shares, so they have to buy to cover as the price increases so that they won’t lose enormous amounts of money at the end of the week on selling out those options contracts.

Here’s the play as I see it … money will flood into FSR shares and even more into these short-dated calls Monday morning. I’ll buy shares to chase around 30 minutes into trading and then sell some covered calls on them that are significantly out-of-the money. From prior experience, these calls should go down in price by the end of the day and I’ll buy them back leaving just the shares. If the gamma squeeze works, then the share price should shoot way up around Wednesday – with a target above $35 – the highest option contract that was purchased en masse. Then I’ll sell the shares.

I really don’t see how long these plays can last, but while they’re here they shouldn’t be ignored. As of now, I made some money on AMC and lost it back on SLV (I wrote about why last week), so this should push me ahead again. FSR is a small money-losing company in the electric vehicles sector, so this kind of action should dwarf it’s normal trading volume and that’s why it should work.

As for other trades, I’ve had a busy week. First I decided that with all of my hedges in place, I really needed to put the unallocated cash to work so I bought more shares of CCJ and went back into the big 4 from GDX: FNV, NEM, GOLD & WPM. Then I sold out-of-the-money covered calls on all of them to get some premiums.

As the week went on, I started to get more nervous about signs that the party might be over and a truly deflationary wind is underway. As Steven Van Metre @MetreSteven explains it, deflation means that big players need cash and they get it by selling things that are very liquid like treasuries, gold, and gold miners. On his youtube channel he showed the head-and-shoulders pattern of GDX and how both gold and gold miners went down preceding previous market crashes.

On Friday morning, there was a major hit to TLT, GDX, and a dip in the major stock indexes. That afternoon as everything but TLT recovered, I bought back my SLV covered calls, sold all the SLV shares, and put all of that money into Jan 2023 TLT calls. Now I’m pretty heavily positioned for a deflationary spike. Here’s how my portfolio ended up:

    • 22.7% Gold Miner Stocks, Large with covered calls sold on them
    • 7.0% EQX (small gold miner stock)
    • 2.4% SAND Calls (small gold streamer)
    • 48.7% TLT Calls
    • 8.0% IWM Puts
    • 1.9% EEM Puts
    • 9.0% CCJ w/ covered calls sold
    • 0.3% Unallocated cash

Here’s how I see things playing out:

Interest rates are near zero on all government bonds up to 2 years duration. Interest rates have been increasing on the long end, both the 10 year and 30 year, hence the declines in TLT. With the prevailing “reflation trade” narrative, big investors are heavily positioned in the short TLT and short the US dollar positions, so that simply reducing risk will create buying pressure in the long bond. Also, the US government pays more interest on its long bond than any other developed country except Australia … negative interest rates and extremely low yields are common elsewhere.

The stock market is at a position where institutional investors are almost all levered long. The short-squeeze crowd has been destroying most of the short trades which the big players often use for hedging, to offset risk on their long portfolios. Another important by-product of the gamma squeeze and short squeeze plays is to increase volatility – just look at any of the names affected like GME, AMC, TLRY and you’ll see what I mean.

Most of the volume traded on the US stock exchanges is as follows:

  • Passive flows from 401k’s into index-tracking vehicles. These simply buy at any price when they are put in and then sit there – they don’t buy or sell in a crash, they just take shares off the table for trading.
  • Algorithmic and high-frequency traders. These create a lot of volume, but with very short-term trades. They front-run other traders by purchasing ahead of them and selling immediately after, or they chase momentum or use other short-term strategies. Whatever shares these guys hold will be sold immediately if the market turns dicey.
  • Momentum traders. These have been some of the most successful investment strategies over the past decade. They look at chart patterns to buy as money flows into a stock and it goes up, and they use risk-management tools like stop-losses to sell shares immediately when markets turn against them.
  • Value investors. These funds have struggled mightily over the past decade as both momentum and index-tracking funds outperformed them enormously. They will buy as prices collapse, but they are small relative to the broader market so they will likely wait for prices to form a bottom before jumping in.
  • Buy-the-dip investors. These guys are mainly retail traders, and they just buy any dip in the stock market because stocks only go up. They have been rewarded handsomely over the past year.

With the above setup, I am worried that the biggest funds either remove liquidity from the system entirely (passive investors) or chase momentum in some way which tends to make both up moves and down moves more extreme.

So what happens next:

  1. Volatility rises, as shown in the VIX, as reduced liquidity makes it even easier for the big gamma squeeze plays to pop and drop stocks.
  2. Big investment funds using a VAR (value-at-risk) model decide that they need to take risk off the table. They are levered long (borrowed money invested in the market), so they can’t afford too much of a down move in stocks. They reduce risk by selling shares to pay back some of this borrowed money.
  3. The thin ice of buy-the-dip investors come in to buy these shares as prices begin to fall. All is well unless they are overpowered by this selling.
  4. If the buy-the-dip investors are overwhelmed, momentum traders and algos see the warning and start selling shares. Other institutional funds decide to de-risk as well. You start to see a growing avalanche of shares being sold with few buyers in sight.
  5. The US Federal Reserve carefully watches for signs of “illiquidity” like they saw in the fall of 2019. They respond by stepping into the market with repos or bond bond purchases (quantitative easing) in order to get more money into the market. They are currently only allowed to purchase government-backed securities including US bonds and mortgages from Fannie Mae & Freddie Mac.
  6. This leads to a significant boost for these securities and a spike in TLT, which is made bigger by the big institutional traders reversing their short positions.
  7. If this happens, I plan to sell my TLT calls and reposition into a number of commodity-related names including CCJ, FNV, NEM, GOLD, WPM, EQX, SAND, and others.

For now, I think I’m going to sell off my gold positions that have covered calls expiring in mid to late march. I’ll probably wait for the covered calls to expire for the week of March 5th and prior. I’ll continue to look for gamma squeeze plays to participate in like FSR above, and I’ll hold more cash on the side. I might go longer even longer TLT at some point, especially if work gets so busy I simply don’t have time to think about markets for a while.

That’s my plan. Good luck formulating yours and hopefully seeing it play out.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s