This week many micro-investors monopolize Media interest as they provoked explosive reactions in the markets. We will briefly mention what happened as we estimate that the substance is not there but somewhere else.
A group on the popular Reddit network, managed to organize the millions of participants in it and lead to massive stock purchases and call options of GameStop. The choice was not accidental as some hedge funds had borrowed and sold even more of the company's existing shares. So instead for hedge funds to be a piece of cake to make profits, they suddenly found themselves losing billions and small investors enjoying massive quick profits, even being floating for many of them.
This is the point. But behind this there is a rapid change in the way investment information is now organized and channeled through social media. How the investments went through the specialized lengthy analyses of investment houses, to the amateur analyses of 2-3 tweets, the few- characters analyses by great investment professionals and the frenzy that can be caused even by a word of a famous businessman, investor or manager.
Investments’ world has changed forever and events like what happened with GameStop and might happen later with other companies, just confirmed it in the most emphatic way. Investments have become accessible to everyone and information (valid or not) even more easily accessible. The path [investment information - execution of a transaction] is mostly only 3 seconds time for the average person.
When we add to this the putting together of an investment crowd by a team, then it is obvious that the power of many becomes frightening and measurable even to the giants of hedge funds.
This change makes studying of some market monitoring models simply ineffective, as the information is guided and not symmetric. A typical example is the set of call options for the US market until January 27, which is shown in the following graph.
Call monitoring is an indicator of investment sentiment. A sharp increase in calls can be attributed to excessive buying optimism and foretells negative situations. From the beginning of December and until a few days ago we had a sharp rise of calls, a fact that "rang" a risk bell from large investment and other companies.
It turns out, however, that the volume of all these call options was not the result of a buying frenzy, a buying frenzy where everyone buys everything, but was the excessive position opening of small investors in specific companies. It is no coincidence that the observational capacity of this measurement changed dramatically when investing in equity options became affordable and easy for everyone. The above is confirmed when the events that followed the ‘GameStop series’ led to the violent closure of these positions and are captured in the chart of January 29th.
In our estimation, the above actions are the ones that have caused a sharp rise in volatility and not the fact that the pandemic in America is out of control. Extreme movements in the options markets have caused strong shocks in the markets and this is clearly reflected in the following graph which shows that the sharp increase in call options (buying enthusiasm) is followed by an increase in volatility. And the fact that the options curve has been reversed sharply increases the chances of volatility falling and markets rising.