Diving into why the GameStop and AMC stock rally hit the brakes, we’re looking at trading halts and the shortage of out-of-the-money call options. This sheds some light on what’s driving the meme stock frenzy.
- The rally pause may be attributed to more than 38 trading halts imposed on GameStop and AMC stocks during a single session, impacting market stability and investor sentiment.
- A shortage of out-of-the-money call options on May 14th, exacerbated by surging stock prices, hindered the rally’s momentum, as highlighted by Jim Cramer’s commentary.
- Despite the pause, the long-term uptrend remains intact, with indicators suggesting potential support for GameStop’s share price, while AMC signals a similar trend despite the formation of a death cross in the short term.
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After GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC)shares jumped 193% and 155%, respectively, in two trading sessions, the rally fizzled out on the third day.
Several specific factors can explain why the bullish momentum at least paused. Here are a few of them:
Trading Halts
The first reason may be related to the trading halts imposed on GME and AMC stock during the trading session on May 14th. These stocks experienced a total of more than 38 halts.
When a stock undergoes highly volatile price movements, stock exchanges may implement temporary trading halts to stabilize the market and allow investors to digest new information. These halts are intended to prevent excessive and uncontrolled fluctuations in share prices.
In the case of a stock with an ultra-bullish trend, particularly a “meme stock” influenced by speculation and hype on social media, the upward momentum can be extremely sensitive to market sentiment. Frequent halts can disrupt this momentum by interrupting the continuous flow of buying and selling, potentially causing some investors to lose confidence or adopt a more cautious approach.
Additionally, there is a psychological aspect to consider. Each halt can create uncertainty among investors, as it may be interpreted as a sign of instability or risk associated with the stock. Consequently, some investors may choose to sell their positions as a precautionary measure, thereby halting the rally.
Furthermore, excessive halts within a short timeframe can draw the attention of regulators and the media. This increased scrutiny may lead to questions regarding the sustainability of the rally, potentially altering market sentiment as investors become more skeptical about the stock’s long-term prospects.
Former SEC Chair Jay Clayton’s remarks on the craze surrounding meme stocks underscore this point clearly:
“[the meme stock rally] It bothers me. It bothers me on many levels. It is a lot closer to gambling than it is to trading and certainly not investing.
Is a tweet really investment advice? I think we’ve learned over the last five, six, seven years that a tweet is really never investment advice.”
Call Options Shortage
Another probable factor that may have dampened the meme rally was the shortage of out-of-the-money call options during the trading session on May 14th. Jim Cramer, a prominent figure in the meme-stock community and host of CNBC’s Mad Money, highlighted this aspect prominently through his posts on X.
Gamestop bulls need out of money call buying to get things going but there's nothing to buy!
— Jim Cramer (@jimcramer) May 15, 2024
As the trading session commenced on May 15th, with GameStop shares plummeting by over 30% in the initial hours, Cramer once again referenced out-of-the-money June calls.
of course crickets from Gamestop, Where is Hello Kitty taking up out of the money June calls to get something going here. Need higher strike prices to create a Verdun for market makers who will probably go crying to the authorities who won't listen anyway
— Jim Cramer (@jimcramer) May 15, 2024
We can distill the following points by delving further into Cramer’s stream-of-consciousness commentary and seeking a clearer explanation of the situation. The primary issue at hand is the scarcity of out-of-the-money (OTM) call options, which are crucial for GameStop bulls who anticipate a rise in the stock price.
With shares surging more than 100% in a single trading session, all out-of-the-money calls have transitioned into in-the-money calls. A notable example can be found in a post from @unusual_whales’ X page. On May 9th, GameStop’s shares surged to $40 overnight, causing its entire options chain to be in-the-money (ITM). This occurrence led to a significant upward movement in the stock price the following day.
We've provided $GME, GameStop updates since April 24th, when unusual options flow started hitting.
We will continue highlighting $GME's options
Right now $GME's $40 overnight price means its ENTIRE options chain is once again ITM.
Last time that happened, $GME sky-rocketed. https://t.co/9jNsvtj4g8
— unusual_whales (@unusual_whales) May 14, 2024
Several key points emerge after delving deeper into the dynamics of options trading and considering Cramer’s perspective. Firstly, options are renewed daily, with new options created in each trading session. However, with shares experiencing dramatic surges of up to 100%, these options were quickly filled, leading to a shortage that impeded their ability to drive the stock price higher.
Furthermore, Cramer advocates for the availability of higher strike prices for out-of-the-money (OTM) call options, which could stimulate significant market activity. He likens this scenario to “a Verdun,” symbolizing intense and continuous trading activity. It’s important to note that a rush to buy these higher strike price options may pose challenges for market makers, potentially prompting them to seek regulatory intervention. Consequently, skepticism may arise about the effectiveness of such intervention, suggesting that authorities are unlikely to respond.
Reviewing the GME option chains expiring next Friday, May 17, it’s evident that the highest volume is concentrated in out-of-the-money calls at strikes of $40, $50, and $57. This indicates a strong expectation of a surge in share price in the coming days. However, there is also significant volume in out-of-the-money put options expiring on the same date, with strikes at $30 and $25, respectively.
Similarly, the highest volume for options expiring on May 17 for AMC is focused on out-of-the-money calls with a $6 strike, just 50 cents above the May 15 share price. This is followed by strikes at $7, $8, $10, and $12.50, with a notable amount at the $22 strike. However, there is slightly higher volume in out-of-the-money put options expiring on the same date, with strikes at $5, $4, $3.5, and $3.
What’s next for GME and AMC?
The meme stock rally has taken a pause, but it’s uncertain whether it’s just a break or if it’s coming to an end.
Reflecting on history, particularly 2021, asserting that this is the final meme stock rally is challenging. Hence, I believe “pause” is a more fitting term.
Let’s examine the indicators:
In the short term, GME shares transitioned from an extreme overbought condition to oversold at the onset of trading on May 15. Gradually, they returned to overbought territory by the session’s end. The 50-day simple moving average (SMA) experienced a death cross, crossing below both the 100 and 150 SMAs. However, the latter remains in a long-term uptrend, potentially supporting GameStop’s share price at higher levels.
For AMC, the scenario mirrors GME in terms of RSI movements, with the moving averages also forming a death cross. However, the 150 SMA indicates a long-term uptrend.
Regarding AMC’s business news, the company sold $250 million of stock late Monday (May 13) following the meme stock rally, concluding its “at-the-market” equity offering program. This potentially signals an end to dilution for now, which is positive for both the company and its shareholders.
Despite GameStop’s substantial stock appreciation, no announcement has been made regarding the sale of equity and dilution of shareholders, including purchases made by insiders like CEO Ryan Cohen.
Additionally, Keith “Roaring Kitty” Gill has persistently posted cryptic videos on his X profile. A public appearance by this esteemed trader, revered by meme stock investors, has the potential to reignite excitement surrounding meme stocks. Let’s await the next developments.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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