We have officially hit wacky world. If the markets were a pinball machine measuring emotion, the "TILT" sign would be flashing red.
Elon Musk tweets about Etsy ( ETSY) , and the stock runs 10%. He didn't say he was investing in the company or even buying the stock. It was vague. Heck, he might have loved the Bernie Sanders crochet doll.
Chamath Palihapitiya tweets out he purchased 50 Gamestop ( GME) Feb. 19, 2021 $115 calls, and the stock spikes from $81 to $93, then gets halted. No one did the math to realize this buy probably cost him between $100,000 to $150,000. The level of risk for him on that trade is akin to any of us finding a penny on the street.
What's even more broken is this trade I was able to pull off on Gamestop. Look, I know you're not going to be overwhelmed by it. The problem was I lined up a much bigger trade, thought I must be seeing things, so I called my business partner (Bob Byrne), walked him through the trade, and asked, "What am I missing?"
When he responded, "Nothing. I need to get in on this!" we were too late to get any size of significance. I had done just a small test trade and grabbed the screenshot.
What you see here is a ratio put spread. I sold four July 16, 2021 $1 puts to buy two July 16 $2 puts. The original intention was to do this same ratio but in the hundreds; however, like I said, I hesitated because logic got in the way. Here's why:
I was paid to do this trade. It was only $3 per ratio, which is one long by two short, so you might be thinking, "So what?"
The "what" is the risk. This is net short puts, so we have to calculate downside. Our worst-case scenario is the stock goes to $0. In that case, my four short puts are now down $400. But, remember I also have two long $2 puts. Those are worth $200 each, so $200 times two is $400.
Basic math tells us $400 minus $400 is zero, yes zero. That's my downside. But remember, I received income to make this trade. I get to keep that. So, my worst case is making $3 per spread. And if the stock happened to close at $1 on July 16, I would make another $100 per spread.
This is a rare case of a no-risk trade. That's why I kept questioning what I was seeing. This shouldn't exist.
And let's not get past the fact that the $1 put could be sold for $0.07. It is 99% out of the money and offering a 7.5% cash secured rate of return for six months.
In my past experience, when these types of things occur, they are at or very near the peak volatility around a stock, sector, or even index. Keep that in mind if you are a net buyer of either calls or puts around the stock. You could get the direction correct, but if the implied volatility sinks quickly, it may not matter for your position.
