By: Steve Smith
What a wild week! By the time you read this, I’m probably already at the local Tiki Bar.
We can’t do a Friday review without once again touching on what we’ll refer to as “the Gamestop (GME) situation.” It has sucked all the air out of the reporting room, creating vacuums of liquidity and exposing the market’s various plumbing cracks in the process — the inexplicable regulations and capricious application of rules.
As predicted, there’s already a hew and cry for more regulation. On Friday, Congress held a special session with ill-informed members spewing sound bites about banning short-selling, limiting day trading, censoring social media and general overreacting. The GME situation’s undoubtedly a unique spectacle. However, it’s an event of the moment and the tent will fold soon enough. Let’s hope we don’t get a bunch of new regulations addressing it which would do nothing to prevent or reign in the inevitable arrival of the next circus.
The actions taken by brokerage firms Robinhood, Interactive Brokers (IBKR), TD Ameritrade (AMTD) to limit trading, and in some cases force liquidations, in squeeze names such as GME and AMC, illustrate the conflicts of interest and antiquated infrastructure in processing transactions.
First, these firms were very slow to increase margin requirements on the squeeze names, only doing so on Thursday. It should’ve happened on Monday, or dare I say many accounts never should’ve never been given margin privileges initially. I’ll chalk that up to sloppy risk control. But, the next two steps were nothing short of nefarious — possibly bordering on criminal. Knowing the huge amount of exposure they allowed through margin, the firms then limited the ability to open new long positions. The initial market response was predictable; GME, AMC, BB, etc. immediately dropped 50% to 100%. The sharp declines then triggered margin calls, or forced liquidations. What a shock! These firms basically escorted customers up rose-covered stairs to the gallows, pulled the guillotine, and then said ‘oops, how’s your head up in that basket?”
Also, as I mentioned, the exchanges never should have listed new out-of-the-money strikes with just two days until expiration, which also came under trading restrictions.
T+3 settlement dates in the age of instantaneous transactions? Ridiculous.
There will be more to cover in the days to come. However, let’s move on to what I was actually doing while this circus was going on.
Do I need to repeat I stick to my knitting? It wasn’t a banner week, but thanks to hedged positions and unemotional adjustments, the Options360 Service portfolio made 2% this week while the S&P 500 lost 3%.
And this comes despite nearly all the Options360 bullish positions having the price go against us. But, thanks to the initial strategies structure, which has an income-generation component, and some timely adjustments in positions such Wal-Mart (WMT) and Morgan Stanley (MS) to collect more premium and reduce cost basis, we weathered the storm without feeling much turbulence.
Until we meet again, have a great weekend and enjoy this old but timeless tune