Schaeffer's Senior Quantitative Analyst Breaks Down GME Trades [PODCAST]

What made GME an attractive bullish play before meme stock mania

Managing Editor
Jan 22, 2021 at 2:06 PM
facebook X logo linkedin

On the latest episode of the Schaeffer's Market Mashup podcast, Patrick sits down with Schaeffer's Senior Quantitative Analyst Chris Prybal to talk his two recent GameStop (GME) options trades that netted 706% and 655% returns, respectively. Chris walks through what made GME an intriguing bullish pick (4:14), how options traders are impacted by it all (9:30), historical context and future ramifications (17:29), plus other sectors and industries that caught his eye for 2021 and beyond (21:50).

Transcript of Schaeffer's Market Mashup Podcast: January 28, 2021:

Patrick: Ladies and gentlemen, welcome back to the Schaeffer's Market Mash up. It has been a minute folks, little over a month last time I checked. Happy belated new year to everybody first of all and what a time to reconvene though, am I right? The past week on Wall Street has been one of the weirder in recent memories, and that's saying something. You've got Reddit folks banding together to take down hedge funds, Twitter personalities clashing left and right, stocks with zero technical prowess, soaring to unheard of levels. It's like one plus one equals three or down is up and up is down. I can't tell you how many texts I've gotten from people asking me because they know I work in the financial space. What on earth is going on? I don't really know either like I'm sorry I have no clue. I needed an expert to unpack all of this. So, without further ado, please welcome back Schaeffer's senior quantitative analyst, Chris Prybal to the podcast. Chris, what is happening, my man?

Chris Prybal: Thank you, Patrick. First off for having me back you've had an impressive list of guests here on the show. I mean, it really took me a while to go through all the podcasts because I wanted to scrape as many notes together because I was learning things each time. So, good job to Schaeffer's for bringing all these people together, good job to you for putting it together. This volatile market it really is a head-scratcher. We got a lot to talk about, Game Stop, man. Where do we begin on this? Where do we begin?

Patrick: I don't even know. 

Chris Prybal: Let me tell you a little story about Game Stop while we begin that kind of brings everything together. We're the longest of time; let's say going back to the all-time highs on Game Stop, 2013 until February of last year, 2020 Game Stop had fallen 95%. So when you hear these short sellers being upset or losing money, keep in mind that they have made a killing on Game Stop for quite a long time. Maybe they had made too much money on Game Stop because last year things fundamentally started to change on the company and from the media flow and the sentiment, it was unnoticed to a certain degree. There was a point last year Patrick, in 2020 GameStop had 6 billion in sales that had been followed and that's what people were arguing. 

However, the market cap of all of the Game Stop shares was only 300 million. So you've got a company that's going 6 billion in revenue, and it's only valued at 300 million. How many companies today would love to have 300 million in revenue, but they're valued at 6 billion? What was totally undervalued coming into 2021, short interest from the end of 2018 was only 15 million but then, by the beginning of this year, it had shot up to 71 million. If that's in the indication of how much shorting was going on, as GameStop was going down, I cannot make a fundamental case for why GameStop is trading at $350 up a hundred percent from yesterday's price. I will try to bring it together for you later in the pod, but I think that's a good place to stop as a lead into the first trade. I think we wanted to highlight, correct?

Patrick: Yeah. So you had two options trades to start, or at least to end 2020 heading into 2021. I'm looking here at our spreadsheet and I'm seeing your respective gains of 706% and 655%. So first things first, congratulations good buddy, because that is quite the haul. You started to allude to some of the drivers such as the short interest and the favorable market cap. What else led you to this bullish GME position?

Chris Prybal: RC ventures took a position late last year and this had been, this was a follow-up to an announcement the company had made where they were going to become a streaming partner with Microsoft. That was on October 8th of last year and the stock did gap up 20% and it had a good start. But once again, we're talking about when GameStop was in the teens, not 350, like it is now. So it has made a big move, but initially the sentiment against it was still so negative. I mean, you've seen the Barron's articles that are routed to the group, the [unclear 05:27] alpha articles. These were 2, 3, 4 weeks ago. 

You know, when GameStop was in tens and the twenties, you know, these people were bashing it like it's, blockbuster. You know [unclear 05:41] out of business, why would you want to own this company? And I started thinking about it every time I drive past to Game Stop; there are people outside the door. And I know there was that craze because of the release of the new gaming consoles, but it seemed to me that they had a lot of traffic. They have a lot of revenue; there is value in this company. You coupled that with the Microsoft partnership, who's decided Microsoft couldn't buy GameStop even at these levels and just make it an X-Box store and sell gaming platforms and accessories and items to the community, almost their bricks and mortar leg of the streaming platform.

You can connect both ways. So when you look at, you know that there are possibilities to the fundamentals, improving enough. Now, again, I think we've gotten out of control because it's worth like $20 billion right now. When I put on this trade, it was 3 billion. I look at esoteric indicators and all of them is a 1000 day moving average.

Patrick: Okay. So that comes out too.

Chris Prybal: Roughly a four year moving average.

Patrick: Four year moving average, okay.

Chris Prybal: [Unclear 07:02] 52 calendar days, trading days per year. 

Chris Prybal: It's a long-term moving average obviously, but GameStop had traded, had begun to trade into that level and then it broke above the level. So there was some technical signs that there was a sea change occurring. And when I put on that trade, the first one, it was after earnings and GameStop actually pulled back to that 1000 day after being above it, that also aligned with 100% year to date at that time in 2020.

Patrick: I remember that because everyone was saying, wow, you know, look at Game Stop here. This is pretty interesting.

Chris Prybal: At that time, short interest had exceeded the float, the outstanding float of, on the marketplace. There were more people, short Game Stop than there were publicly traded shares available, which that in and of itself is a head-scratcher. And I'm sure regulators are going to look into this because it is creating a huge panic right now, as we talk on many, many, many, many stocks. I just saw a headline on Bloomberg that Joe Biden's not looking into Game Stop. I always get his last name, incorrect, Paul Pate he made money on GameStop this week. And since he's looking at running for governor of California, he's already decided I'm going to donate those proceeds to charity.

Patrick: I've seen that go around a couple of times with people on Reddit.

Chris Prybal: There's just so much going on with Melvin capital needed additional funding because basically they were bailed out on their Game Stop losses. I mean, you got to ask your question, did they not see this coming in advance? In addition to RC ventures, which is Ryan Cohen ventures taken a position Sen vest also took a 5.6% passive stick. Ryan Cohen himself on December 15th, December 16th, while we were already into the first leg of his trade, he personally bought more shares. Why am I telling you this? Well, if you have short interest so high and the available float actually shrinks, instead of increases, those people are even more vulnerable. 

Those shorts, there's not enough shares to cover them all. Now you're going to ask me eventually how option trading played into this. And there is a combo effect, the rush by the Reddit crowd that the Discore Trout, Robin Hood traders, Stock Put you name it. When they were rushed in Game Stop, there was huge call volume created. Now you've had exchange brokers and agency brokers and all kinds of market people on this podcast. So I won't get into too much detail, but if I'm the market maker and you as the customer buy the call from me, I'm the market maker. I'm now a net short that call. So how do I hedge my position if I'm net short? I have to buy underlying shares, proportional to the call contracts I sold to you. 

So if there's a huge rush of option traders, demanding call contracts, the market makers go net short, but to heck is that they buy stock, by them buying the stock it pushes it up, which squeezes the shorts and then the shorts have to cover. And then you get hauled seven times in one day, then you get this after hours trading, you cannot blame the after-hours movement on the retail crowd. That's big money player’s right there, that's not the retail money doing that after hours.

Patrick: I think that is being glossed over in certain media outlets where they're just saying its being short squeezed out. You know, it's just Robin Hood traders, you know, just clicking on their accounts, sitting on the couch. You look at the technical it's not that it's the big markets that are making the moves.

Chris Prybal: It's the market makers trying to get a grasp of the situation. And that's why you're seeing implied volatilities on some of these contracts exceed 2000%, which I've never seen that if you get to 1000%, it's super rare. If you get to a 200 IV, it's really, really rare though, 2000 I mean, and that makes it very difficult on retail and any trader because right there in IV, you’re paying so much per contract, that it's almost not worth trading because you're going to have to get so much price movement off of that contract that you need such a fat tail distribution to get what you want done. So it's, the market makers are kind of shutting it down and they will continue to until we get some kind of regulation or some kind of answers or hedge funds blow up and then additional money comes in and that money is blowing up because they're still short. A lot of other companies that are going up 20, 30% in a day.

Patrick: Yeah, AMC.

Chris Prybal: They're taking a hit. These people are taking a hit and it might automatically drive down the overall market, which we need a breather, but it'll drive down the overall value because these companies now have to raise cash to cover their losses. Their best way to raise cash is to sell existing holdings that they have, that they're [unclear 12:35]. So if you have that selling pressure it's going to put a blanket over the rally.

Patrick: Yeah and what I find scary is I, you know, against better judgment, I perused Reddit earlier today and you have people saying, keep hammer, you know, keep hammering it, keep hammering it. Let's get to 500, let's get to 750. And I think that is what I think it has a lot of people worried. They don't understand the ramifications of that.

Chris Prybal: Yeah, there could and probably will be unintended consequences of this activity that maybe doesn't bite us all in the butt, but it increases fees associated with some of these contracts or it reduces the bid-ask spread in some manner that it cannot happen again, which ultimately hurts us from a commission trading point of view. We'll stay on that I mean, it could happen today. It could happen a week from now it's, they can't let this continue to occur. 

Patrick: Well, what I find fascinating is you look at your trade, you saw something that not everyone else saw, you know, across the market, and then you were able to benefit from that. But, so like once it crossed a certain line though, it became so disconnected from reality that you almost had to kind of throw your hands up and say like, okay, what's really happening here? It's such a weird mix of very astute market reading and then just completely unregulated chaos.

Chris Prybal: Trading the market can be so much fun, but it is also very humiliating even when you win. Such as this case, while I've took huge profits, I missed out on over a hundred percent stock gains that would have took this option trade to even, you know, we would have been talking about a 1500 or a 2000% gain on this trade and I'm humiliated that I didn't keep it open. But at the same time, when you're seeing distorted price movements and you have a subscriber base as large as we have at Schaeffer's, you have to take care of the client. You have to think about how am I going to get these people out at a good price because it's not just me?

Patrick: Exactly. You have to remove your own ego and vanity from it.

Chris Prybal: There's tens of thousands, 20,000 contracts just on the opening day. So you're getting a lot of people and you don't know how many people added to it after, or took the position off, but there's a lot of money chasing these trades. You want to get them out at, you're obviously getting them out at a great price in the situation, but you want them to get out in an orderly fashion and not chase the market emotionally, because they see swings. So it was very difficult exiting trades.

Patrick: I see you had you’re, for one, for the event trader, you had your final partial closed on the 15th. And then for your, I think it was options under $5 was the final partial closed a week later on the 22nd. What was going through your mind when you were closing these out? Did you have any incline that this was, that this chaos was about to happen? I mean, like you said, you had to; you have to protect your investors.

Chris Prybal: I never thought I would advance to this degree. There were drivers in place that suggested it could happen. But really, when you have this wall, this wave of liquidity out in the market and it's looking for a home and it knows certain people are short on certain stocks you can punish them. I look back to my drivers and I said would you be happy with a thousand percent return on the second half of this trade? And any person I know would be like; you know what close that out. That's, a great job and the second trade there that got to 700 and stocks you, that was actually a 1200% exit. So when it gets to that level, where you say to yourself, man, this is awesome this is really good, I'm okay taking the profit then and moving on because we know how the market works. It goes up and it goes down and that 1200% could have easily fallen to 600% the next morning or even less, you know, I could have been closing the second half out less than I took the first half out. And that's really never a good situation to be in you know, you kind of feel like, well, why didn't I take all of it off?

Patrick: Exactly. So I've been working here at Schaeffer's for going on four years in April. And I have never seen something like this happen before, you know, you're a seasoned veteran trader. It has, is there any context in history that we can look back on and possibly learn from about like where we're going next, considering what just happened? 

Chris Prybal: 99 and 2000 when I was growing up, there were dotcom stocks that they filed for an IPO. They began trading and they'd go up 100% in one day, it kind of reminds me of that. Option trading was not as prevalent then; today you have a lot more option volume, which can influence the stock price more. So you've got that dynamic of the low commissions, you've got retail traders. They inherently are usually long only to begin but they're learning how to trade options at a frequent rate and they like them because they can get out, get in and get out the same day. You can, you know, you got a lot of flexibilities, you know, that has amplified the effect. So to answer your question yes, but honestly, no I don't think you can do that.

Patrick: Yeah. I just, I struggled to find a comparison looking back through history and trying to find some connective tissue with it all. So then moving forward, what do you think are some long-term ramifications of the way this escalated out of proportion?

Chris Prybal: [Unclear 18:52] the increased retail crowd and that being young people taking to the stock market is a very beneficial thing for the whole of American society. These people are going to be shareholders for much longer than someone, my age or someone 65 or 80. You know, they've got more skin in the game because they're going to have to live through these changes and with them as shareholders with them empowered to make changes. And to force these companies to clean up on carbon capture and do these other things that just make sense from a society point of view, instead of a shareholder point of view. I think ultimately it's going to benefit us, I do think that we're going to get a, the market's going to run into turbulence at some point this year. I don't think the powers that be want to bring it down so quickly after inauguration.

They want to let it ride, they want; we're still in the COVID effects. They're still stimulating, there's still a lot of people out of work. So they really can't push on the brakes too much because there's a lot of people hurting out on the streets, not wall street, but on main street and the back streets. So they, got to be delicate and the fed. The fed is going to be interesting with what they say, because they kind of got a tap down on things as well, but they don't want to rock the boat because it's still a lot of people hurting. So I'm thinking when we get into June, July the summer months when it's historically weak anyway, I think you'll get a pronounced pool back there always caveats to, you know, there's a black Swan event such as China trying to take over Taiwan. That would screw with the supply chains of many, many tech firms.

Patrick: The semiconductors.

Chris Prybal: Yeah, and the economy overall, because there's always things that could cause that type of swing. But I don't think that they want to bring down a market until summertime, honestly, let more people get their job back, get back to normal. You know, I just don't, there's so much money, so much liquidity right now that any pullbacks going to be purchased. I know me personally, I've got cash in my trading accounts, and I’m waiting for a better price. If it is I'll step in and buy, you know? So there's, if you and I are doing that, there's a lot more, there's a lot of other people doing that same thing. So that's how I feel about that.

Patrick: Yeah, well, very well said. I think if we're looking for an analogy instead of slamming on the brakes on an exit ramp, we're kind of just tapping the brakes a little bit, just, you know, tap every couple of seconds. You don't want to skid out; you don't want to flip the car.

Chris Prybal: Yeah, Like the air brake system that [unclear 21:47].

Patrick: Bingo, bingo. Moving beyond Game Stop and everything else. What are some other sectors and industries that have kind of caught your eye to start 2021? You mentioned briefly kind of we're still digging ourselves out of the COVID hole, but you know, you have some projections saying we're reaching mass vaccination by mid to early summer. Are you watching these trends and trying to formulate your trading strategy for 2021?

Chris Prybal: One into 2021 I kind of made a thematic approach to it, kind of segregated companies into certain sectors or industries. Now I'll share with you, some of them obviously Carbon Capture with Biden and the Green Energy Push, Solar Power. Anything like that, I think it's going to do well, just because of the flood of money going into it. There's going to be technology advances, things we don't even know are possible are going to happen. And you know, a couple of years from now, we will probably going to live in a different world than we are now and it's due to these companies. You could go into 5g, there are a lot of companies in 5g that I like. You could go into 3d printing, 3d printing companies that are revolutionizing the world. 

With GameStop, you could just look at gaming companies. I know you like Draft Kings from previous episodes [unclear 23:18] background, e-sports, e-sports gambling is a huge business, marijuana legalization. That's going to happen this year across the country. Any type of reopening trade, you got Bit coin mining and then probably the biggest one of all is revolution in genomics. This COVID kind of put people under the microscope and set up like RNA sequencing and they sped up development and that's going to benefit us all, whether its cancer research or a plague we don't know about. We're going to be better prepared to handle it.

Patrick: Absolutely. 

Chris Prybal: So, I mean, it's always fun. That's why this trading game, it's very exciting. I'm glad I do this I wouldn't do anything else, but at times you can be humiliated by your own winners. I mean, it's an exhausting game, but how else to make money?

Patrick: It's crazy you know, I can't think of any other aspect of life where if you turn in a 706% return, it's construed as almost like kind of a loss, like what other, you know, situation in sports life is that like, and that's what makes investing so unique. And I think it is starting to ensnare a lot of young traders. So yeah, I really agree with all of your insights into 2021 I think it's going to be very exciting. We've, with big macro events, such as the pandemic, there's always a shift to new technology, a shift to a different way of life. You think of the remote learning or the remote working, you know, we're doing this now over zoom, you know, who would have thought that that would have been so prevalent a year from, a year ago. But it's definitely an exciting time to be in investing. Couldn't agree more.

Chris Prybal: I'm glad, I hope everyone's happy and healthy and they stay safe and we get through this, but man, the markets sure have given us a lot to talk about and we're in the right place with that. Aren't we Patrick?

Patrick: Yeah. I couldn't help, but think that in the past week of like, we are at the center of the universe right now, in terms of investing, and it’s exciting. It's a little daunting and stressful. But hey, the only cure is for that is just a trip to the golf course. Am I right?

Chris Prybal: You're right about that. I can't wait to get some new Callaway woods tested not I changed my budding stroke. I'm left tad low now, it was really good. However, I'm putting on a mat inside my house because of the cold weather. So that's kind of like, is it real or is it not real?

Patrick: Be careful with those mats man, like I did a lot of mat work one off-season and then like the first couple of months, I was just rolling everything, no feel at all. I don't know, maybe that was my own fault, but those mats scare me.

Chris Prybal: We'll have to play golf this year, Patrick.

Patrick: Yeah, absolutely. Chris Prybal, Schaeffer's investment research. Thank you so much for coming on your second time on you were my first ever guest. Hopefully, you know, we can make you a frequent contributor.

Chris Prybal: Yeah. And for those listening, go to Schaeffer's See how many big hits we've had recently. We're going to keep it up so check this out.

Patrick: Chris beat me to the promotion. Schaeffer's, check us out. Instagram, Twitter, you know, our website, we were overhauling our whole front page, so you can see everything as quickly as possible. We're definitely working on some exciting things for the future and hopefully everybody can be involved.

Chris Prybal: An exciting time isn't it?

Patrick: Alrighty, Chris, be safe. I'll talk to you soon. See you in the new office.

Chris Prybal: Thanks to everyone for listening.

Patrick: Take care, cheers.


Unlock Weekend Profits with Chris Prybal's Favorite Strategy Up +487.5% in 2024

With the markets going left, right, and sideways, you need to have a plan now more than ever. 

Expert Trader Chris Prybal is no stranger to volatility, and has mastered finding big stock rallies while other traders aren't looking over the weekend. Rallies that produced gains like +207% on RTX calls, +236% on MARA calls, and +238% on NET calls.

A few simple moves on Sunday at 7pm could be the “Secret Sauce” your portfolio needs to not just stay afloat, but make unprecedented gains in this turbulent market.

Don’t sit on the sidelines, beat the market with Chris Prybal's strategy. Join him now!