Hello, my name is Carter Smith. I am 17 years old and the vice president of the Stock-Options Club at Wellesley High School, started by Yonas Schneider. I am currently enrolled as a junior in the remote learning section of Wellesley High School. I have lived in Wellesley all my life and loved it to my fullest extent. My father is a stock trader; I believe he is what got me into the market and trading in general. When I was 14, I bought my first stock, Tesla, at $235. I sold it not long after at $330, thinking I made it big. If only my younger self could have seen the potential…
But I need to be clear, stock and options trading are completely different animals. I have been options trading for almost 3 years now. I have always believed that if there was an opportunity out there, that I should at least learn about it before outright refusing it. And so I did. All throughout middle school, I taught myself things that even high up hedge fund managers have a hard time grasping.
This leads to what happened Tuesday, when I used $500 dollars and bought nine call contracts on Nokia (stock ticker symbol NYSE: NOK) using $480 dollars of my capital. Nokia subsequently shot up 98% not long after, and I found myself suddenly sitting on $10,400 worth of capital. This represented a gain of 2,167% in just under 10 minutes.
Why did Nokia suddenly double in value? How did I expect something like that to happen? It all started with a Reddit group, called r/WallStreetBets. Around 6 months ago, a Redditor called u/DeepValue “invested” $75,000 into video gamer retailer GameStop’s dying stock (known as GME on the New York Stock Exchange). DeepValue bought deep Out of the Money (OTM) call contracts—an extremely risky investment with very little chance of profit. He posted his positions to the online forum and gained traction for how ridiculous the bet was. I was one of the many people telling him that this wasn’t the best use of his money. His posts started to gain even more traction, and due to the monkeys and typewriters rule, some people started to invest with him. Given some time, the stock started to steadily rise.
Meanwhile, massive investment firms such as Melvin Capital saw a declining business in GameStop and began to short the stock, which means they borrowed shares and quickly sold them off, figuring they could make a profit by later buying them back at a lower price. GameStop’s outstanding shares were shorted over 100%, meaning that the consensus was not good for GameStop. As DeepValues’ army grew, the GameStop stock began to rise and the big investment firms and individual investors who shorted the stock lost money. Smart investors who had a good risk management system decided the losses were too much and closed their position. When closing a short position, you have to buy the stock for every share that was shorted.
As more and more people started closing their short positions, the stock began to rise even faster, causing even more shorts to close their position, and so on. This is called a “short squeeze” and can be a massive catalyst for the transfer of wealth. As the Reddit group started getting national attention, the narrative changed to bankrupting global hedge funds that shorted the stock. This is why the stock continues to rise today, as everyone can enjoy exacting revenge on the hedge funds for the 2008 crash, not to mention that it’s really fun. As of Friday, Jan. 9, the hedge funds that shorted GME had lost over $70 billion.
So that’s great, but where do I come in? Thinking I was too late for the GameStop rush, I was looking at the next short squeeze on the market. I saw the trend of investors throwing thousands of dollars into dying companies collectively, causing a short squeeze. This happened with AMC Theaters (NYSE: AMC) and Blackberry (NYSE: BB) The criteria were strict.
- The short volume had to be above 10% of the outstanding shares. If the short volume was less than that, we would risk the pump not being enough to trigger a short squeeze.
- It had to have been a stock that everybody liked. Everybody online was banding together as a team, and there could be no disagreement whether or not the company was morally correct.
- It had to be a stock that had been mentioned frequently on online forums before. No investor likes a new stock ticker symbol being thrown at them with the prospect of being “the next big thing.”
- This was the hardest of all criteria. The Implied Volatility (IV) had to be low, with the effect of the gamma (Γ) being high. If the gamma was not high on the underlying security, it meant that with swings in the delta, (Δ) the option holder would not be forced to either buy or sell their position. I needed a stock that with a small swing in delta causes a massive swing in gamma.
I spent hours Monday pouring over fundamental data, earnings releases, graphs of all sorts, and online forums. I searched alongside an online friend and found that two stocks fit the list. One of them was Nokia (NYSE: NOK) and the other was Palantir Technologies (NYSE: PLTR).
After a lengthy disagreement, and double-checking the data, I chose Nokia stock due to the higher chance of profit. I bought 9 deep OTM call contracts for Nokia expiring on Feb. 5. As it turns out, I shouldn’t have stressed my decision, as both of the stocks shot up a sizable amount Tuesday.
So what happened? Something I did not expect. The NASDAQ exchange began to halt activity on Nokia stock, due to “High Volatility.” I could not place an order to sell when Nokia was halted. And as if fate was laughing in my face, the brokerage I used at the time crashed. Everybody who used it was facing technical difficulties due to a high influx of traders. I could do nothing that day but sit and wait until 9:30AM the next day.
The next day, after my brokerage patched the bug that caused the crash, I opened my account to find most of my gains lost, as Nokia had plummeted. I had expected Nokia to at least maintain the inflated value for a day, but I had hoped too much. I sold out of my position and took my money out of the brokerage.
As it turned out I wasn’t feeling bad at all. I was mostly happy that I was right. This past week marked one of the most historic weeks for the market of our time. I will keep trading options and hope to for the foreseeable future. As for now, I will miss the money but will settle for the good story.
- “How Hedge Funds Created a Financial Crisis for Millions.” The Balance, Accessed 29 Jan. 2021.
- Burton, Katherine. “Hedge-Fund Titans Lose Billions to Reddit Traders Running Amok.” Finance.yahoo.com, 29 Jan. 2021, Accessed 29 Jan. 2021.
Have an article idea for Swellesley? Email us at [email protected]