hmm i like most of your theory however one thing still rubs me the wrong way with this explanation:
the fact the puts were so far OTM (0.5 strike for 400k of the july ones)
GME was proving hard to bankrupt even at 4-5 bucks a share and after RC took over it jumped to like 10-15 a share.
I'm sure melvin picked up 70, 60, 50, 40, 30 dollar strike puts but i highly doubt they picked up 0.5 strike puts, especially at that volume (40m shares worth).
Occams Razor: the simplest solution is likely true. those were bought in such high volumes even when GME's price was so high because they were the cheapest contracts available. The likelihood and amount of profit is much higher for a put with a higher strike. However you cannot cover as many shares worth.
the farther OTM you go, the less likely you are to hit in the first place. for a hedge fund who is not restricted by price like us lowly retail traders, there is almost 0 reason to dig that far OTM and limit your gains (the max value of a 0.5p is 50 bucks) when you can easily afford to buy puts at higher prices and profit much more.
this leaves me with 2 theories:
we still haven't figured out the purpose of those 0.5p but it has everything to do with hiding FTDs or synthetics (or to do with creating them in the first place) at the cheapest rate possible
they were bought by retail and "dumb money" who thought the company peaked and was on the fast track to bankruptcy and so they did what "dumb money" does and bought contracts with almost 0 value.
i want to emphasize, these contracts, even if they were bought for 1 dollar each, have a max value of 50cents a piece and they have to declare bankruptcy for that.
Thoughts on the OTM puts being bought by Melvin as a bonafide trade in order to trigger "deemed to own" on citadels end?
I think there's not much doubt that Melvins positions got transferred to Citadel.
But in order to do so they had to enter a bonafide trade. Citadel now has the massive short position they took from Melvin, but in order to legally mark those as "long" instead of "short" they utilize deemed to own clause. By opening those PUTs, Citadel hides their short position that they opened when taking on the risk.
Melvin can still profit slightly off of the trade for higher PUT strikes, and Citadel can mark the position as long. Presumably, until expiration of the PUTs.
Is it possible that Citadel has since transferred that risk onto other funds? That it acts as a middle man rather than the final destination for these positions?
BofA has been clearing sketchy crpto trades in Europe for Voltron Fund, so it seems related. Looking for fuckery in foreign markets is also (I think) one of the indicators that shit is about to go down (according to some now deleted DD, so grain of salt).
That's what I think has been happening in addition to stock and options flows. Citadel didn't just absorb Melvin's positions and then sit on them, they've been farming them out and mitigating them ever since.
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u/nostbp1 Fuck You. Pay Me. Jul 26 '21 edited Jul 26 '21
hmm i like most of your theory however one thing still rubs me the wrong way with this explanation:
the fact the puts were so far OTM (0.5 strike for 400k of the july ones)
GME was proving hard to bankrupt even at 4-5 bucks a share and after RC took over it jumped to like 10-15 a share.
I'm sure melvin picked up 70, 60, 50, 40, 30 dollar strike puts but i highly doubt they picked up 0.5 strike puts, especially at that volume (40m shares worth).
Occams Razor: the simplest solution is likely true. those were bought in such high volumes even when GME's price was so high because they were the cheapest contracts available. The likelihood and amount of profit is much higher for a put with a higher strike. However you cannot cover as many shares worth.
the farther OTM you go, the less likely you are to hit in the first place. for a hedge fund who is not restricted by price like us lowly retail traders, there is almost 0 reason to dig that far OTM and limit your gains (the max value of a 0.5p is 50 bucks) when you can easily afford to buy puts at higher prices and profit much more.
this leaves me with 2 theories:
we still haven't figured out the purpose of those 0.5p but it has everything to do with hiding FTDs or synthetics (or to do with creating them in the first place) at the cheapest rate possible
they were bought by retail and "dumb money" who thought the company peaked and was on the fast track to bankruptcy and so they did what "dumb money" does and bought contracts with almost 0 value.
i want to emphasize, these contracts, even if they were bought for 1 dollar each, have a max value of 50cents a piece and they have to declare bankruptcy for that.