What pro traders, the Reddit crowd and regulators may do next

What’s next for the Reddit crowd? Wall Street seems unsure. 

The “blow-out-the-short-sellers game” is showing signs of exhaustion, but the ramifications are only just being felt.

What traders can’t agree on is what will happen next. There are four buckets of discussions: How will traders/hedge funds react? How will trading platforms react? How will regulators react? And what’s the next move for the “kill-the-hedge-funds” traders?

A major hedge fund losing money gets the attention of Wall Street. Wall Street does not want to get steamrolled on this short-squeeze game again. Many short sellers like Melvin Capital have already unwound their short positions.

Another response from dealers may be to increase option prices, particularly on out-of-the-money call options. 

But many are still trying to profit from the game. “Anyone who knows anything about options is trying to figure out how to sell GME options,” said Larry McMillan, an options advisor with McMillan Advisory. 

Why? “There haven’t been too many short squeezes like this in recent history.,” he said. “As long as people believe fundamentals matter, they are going to be selling short stuff like GameStop.”

He noted that with GameStop stock trading at $260 in after-hours trading Thursday night, the $260 call expiring Feb. 19 is selling for $107, which means it would have to be above $367 to make money. The put at the same strike price is selling for $150, so it would have to go below $110 to make money.

“The issue, is how to do this without leading down the road to ruin?” he said. “It’s highly risky but definitely possible.”

Online brokers like Interactive Brokers and Robinhood have put the brakes on trading in individual stock and options on many of the heavily shorted names. TD Ameritrade is raising margin requirements and preventing shorts on these names. Robinhood said the decision to restrict trading was a risk-management choice to meet “financial requirements, including SEC net capital obligations and clearinghouse deposits.”

While Robinhood has faced considerable criticism from many traders for its actions, Global Markets Advisory Group’s Charles Dolan said the online brokers have significant reputational risk.

“If I’m the CCO [chief compliance officer], I will be very conservative and overreact rather than underreact because it is easier to fend off an angry customer than fend off an angry regulator,” said Dolan, whose firm provides strategic advice on market structure and regulatory compliance.

Robinhood and Interactive Brokers resumed limited trading of previously restricted securities on Friday.

You know it’s a strange situation when ultraliberal Rep. Alexandria Ocasio-Cortez and archconservative Sen. Ted Cruz agree there should be hearings…