Short interest in meme stocks drops as hedge funds target call options
Data: IHS Markit; Diagram: Will Chase / Axios
The origin story of the meme stock phenomenon revolved around a riot of retail investors seeking to make money at the expense of the short sellers on Wall Street.
But in today's meme stock world, there isn't that much interest in the names that are the most popular at WallStreetBets. Instead, trading activity appears to be increasingly driven by call options, reports the Wall Street Journal.
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Driving news: Mudrick Capital - a hedge fund that benefited from AMC Entertainment trades this year - recently lost its flagship fund 10% in just a few days, thanks in part to betting on AMC options, the WSJ says.
Why It Matters: Even though meme stocks have passed their highs, they continue to trade at sky-high valuations separate from fundamentals. Many, like AMC, GameStop and newcomer Clover Health, booked another day of winnings in Friday's session.
How it works: Call options give buyers the right to buy a particular stock within a specified time period. A buyer of the call option makes money when the stock rises.
Increases in call options activity may force the option sellers to buy the stocks as they may have to deliver the stocks. That drives the share price up.
The chain of events is known as a gamma squeeze.
State of play: Investors such as hedge funds could buy certain stocks to trigger a gamma squeeze, Helen Thomas, founder of British financial research firm Blonde Money, told the WSJ.
Such a squeeze can accelerate a stock's rise - and its decline, too.
The bottom line: "Hedge funds are afraid to hold positions in significant short positions [in meme stocks] even if it makes a lot of sense in principle," Lorenzo Di Mattia, Sibilla Capital's chief investment officer, told WSJ.
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