The Key Options Trades That Ignited GameStop (Round 2)

We were cruising along so nicely yesterday afternoon. For the second day in a row, Federal Reserve Chair Jerome Powell rescued a declining market with Congressional testimony that reaffirmed the Fed’s continued commitment to monetary stimulus until or unless we achieve some combination of sustained inflation above 2% and full employment. Since none are immediately likely, many traders took this as a signal that it was relatively safe to invest in equities. Many traders then extrapolate that signal to imply that if it’s a good environment for investors, then it’s also a potentially good environment for speculators. And of course, the nexus for speculators is GameStop (GME) and the other so-called “meme stocks”.

Yesterday’s move in GME caught most of the market by surprise. The stock had been moving higher throughout most of the session, but only modestly (at least by the recent standards for GME). Having started the day around $45, it flirted unsuccessfully with $50 at 11:15 before giving back about half its gains in the next 15 minutes. It then clawed back slowly towards $50 once again, finally crossing that threshold for good at about 2:40. At that point, there was still no signal about what was about to transpire just a few minutes later.

Last week, I wrote about the market’s fascination with round numbers, so it wouldn’t surprise me if many traders used $50 as a key resistance level. I have no way of knowing for certain how many short sellers were using $50, whether as a stop loss for themselves or a buy signal for aggressive traders. However, it is logical that it would be considered a potential breakout point on a day where we saw widespread speculation. The stock began to trend higher in the few minutes that followed.

I consider this to be the turning point: at 14:58, when the stock had already jumped to $53.47, someone bought 750 contracts of the 50 strike weekly calls that expire tomorrow (2/26/21) for $6.85. In a stock and an options class where small trades are the norm, this one stood out. 

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