Blah blah blah:
Clover Health Inc., a health insurer backed by venture capitalist Chamath Palihapitiya, was swept up in meme-stock mania on Tuesday, posting a second day of wild gains as retail investors banded together to punish short-sellers betting against the company.
Clover rallied 86% to close at $22.15 in New York trading after briefly doubling intraday. The gains erased five months of losses in the stock — which formed part of a broader selloff in Palihapitiya-backed companies — in just two days. Trading volume in Clover was more than 29 times the three-month daily average on Tuesday, with a record 718 million shares changing hands.
The sudden flurry of demand comes after retail traders realized that short-sellers had been swelling their bets against Clover, a move that left them vulnerable if the stock were to start rallying. The stock’s story — like many retail plays — has left behind fundamentals with shares trading above $20, that’s more than twice the average analyst estimate.
The firm came under pressure … after Hindenburg Research put out a report alleging that it misled investors, which Clover Health’s management disputed. …
Some Reddit users are speculating that Clover Health could be the next short squeeze, which is characterized by a high level of its shares being sold short. …?“Apes who missed on $GME! Listen up, $CLOV is ready to lift off!” wrote one user who goes by u/pvr90 on Tuesday. Ape is a nickname for buyers of AMC Entertainment Holdings Inc. shares, which have been among the most actively traded meme stocks in recent weeks.
Here’s a rough outline of the meme-stock cycle:
There is a company. Bad things happen: It gets criticized for misleading investors about federal investigations, it operates movie theaters that are shut in a pandemic, it operates video-game stores in malls as games shift to being sold online, it literally files for bankruptcy. The stock goes down, and valuation-focused investors sell it short, thinking it has further to go. Retail investors on Reddit decide that (1) it is actually undervalued, (2) the short sellers are evil and immoral and must be punished, (3) punishing the short sellers will cause the stock to rocket to the moon and (4) this will all be pretty funny. Lots of Reddit investors buy the stock, short sellers capitulate, the stock goes up. The stock goes up to way, way higher than it was in?Step 2, or at any point in the company’s history. A few people mildly and tentatively suggest?that perhaps the stock’s current all-time-high stock price is not justified by economic fundamentals. Reddit is not having it: Any time anyone says something even slightly critical about the fundamentals, Reddit traders rush to buy stock and call options, pushing the price up even more.
The way to become a meme stock is not just to be?good; companies don’t become meme stocks because Redditors endorse a widespread consensus that they are good operators in attractive markets. The way to become a meme stock is to be?bad, then good; companies become meme stocks because Redditors get mad at hedge funds for shorting them, so they buy them, so they go up, and it’s fun and more Redditors join in.?
There is a lot to say about this cycle but here let’s talk about CEO incentives. There is a usual set of stories?that people tell about the incentives facing public-company chief executive officers. If you are the CEO, it is good for you if your company grows quickly and makes a lot of money. It is good for you to prepare for the future, to anticipate trends, to move your company toward the next big thing. It is good for you to make money consistently, to report steadily rising profits. These things are good primarily because they make your company’s stock price go up, and since you are paid largely in stock and own a lot of stock, you get richer as the stock price goes up. They are good secondarily because, with a high stock price and a good reputation, you will have easy access to capital and you will be able to launch fun projects and make your company bigger and more important. And they are good for softer, more social reasons. If you report consistent rising profits analysts will respect you and you will have nice interactions on earnings calls; you will be viewed as a good CEO and there will be flattering profiles of you in magazines. Your day-to-day life will be pleasant because people will think?you are doing a good job; also the money is good.
Other things would be?bad. If you have an accounting or regulatory scandal, that’s bad. If you operate a tired brand in a declining industry, that’s bad.?Bankruptcy is obviously bad. If your company performs poorly, it will attract short sellers. The short sellers will push down the price of the stock, which is bad for your wallet (since you own a lot of stock). They will say mean things about you, which you will find embarrassing. Earnings calls will be awkward and unpleasant. As the stock declines due to your company’s poor performance, people will blame you for that performance, since after all you are the CEO. Activist investors will buy stock and try to fire you to improve performance. They might succeed. You’ll be out of a job, humiliated, with worthless stock.
Surely the public-company CEO having the most fun right now is Adam Aron, the CEO of AMC Entertainment Holdings Inc., who has embraced his meme-stock status. (It has been widely reported?that he wore no pants on a recent?interview with a YouTube trading influencer;?Ranjan Roy argues that, if true, this was a good meme-stock investor-relations move, which is plainly correct.) One reason that he is having a lot of fun is that he owns a lot of AMC stock and AMC stock is up 2,500% this year. Another reason that he is having a lot of fun is that he has?issued?hundreds of millions?of dollars of stock this year so that he can acquire theaters, “go on the offense,” and make AMC a bigger and more important company. A third reason that he is having a lot of fun is that he is a hero to an army of online investors, who call him the “Silverback”; there?is a lot to be said for being a beloved celebrity.
The way that Aron got here —?the way he got rich, the way he was able to raise a war chest to go after acquisitions, the way he became an internet celebrity —?was by running a company that was heavily shorted. That's not the only thing that had to go his way, but it’s a big one. If analysts and institutional investors had been?thrilled?by Aron’s response to the pandemic, if everything had gone right in AMC’s business, then …?I mean, AMC traded as high as?$16.59 in April 2019, roughly a year before the pandemic; it traded as high as $7.76 in February 2020, just before the pandemic hit it.?Let’s say that, instead of plummeting in March 2020, AMC had responded so well that it got back to its 2019 highs, and then?doubled?from there. That would get it to $33.18. It closed at $55.05 yesterday. Getting memed was just?so?much better for AMC than performing well would have been.
I do not think that George Sherman, the lame-duck CEO of GameStop Corp., is having a ton of fun right now. He seemed pretty flummoxed by his meme-stock status the whole time, and has only grudgingly raised capital. That capital will be used not to pursue his own vision and expand his empire, but to pursue someone else’s vision of closing stores and pivoting to online retail. Also?Sherman apparently has been pushed out by an activist. (He is expected to step down next month.) Nevertheless! “His exit agreement calls for the accelerated vesting of more than 1.1 million GameStop shares,” worth $330 million at yesterday’s closing price.?GameStop has had a net loss of about $520 million?during his two-year tenure. You would not look at his performance and say that, by conventional measures, he has been a huge success. But he is the CEO of a leading meme stock, which is sort of by definition a huge success, and he has?been incredibly well compensated for it.
When Clover went public via a merger with a special purpose acquisition company, it was under investigation by the Justice Department, and it did not disclose that investigation. If it had disclosed it, Hindenburg Research might not have written a mean short report about it. If short sellers were not publicly being mean to Clover, it might not have become a Reddit short-squeeze target. It closed yesterday at $22.15, an all-time high.?If you are the CEO of a company that is considering going public, and you are under an investigation, and your legal obligation to disclose that investigation is less than clear, what lessons would you learn from the Clover story?
I mean, look. I think it would be a strange strategy for a CEO to?try?to become a meme stock. Most stocks —?even most unpopular beaten-down heavily-shorted stocks with?some nostalgia appeal —?do not become meme stocks. Also the meme-stock phenomenon is like a year old; relying on it for your future seems risky. (Also not every public-company CEO would enjoy being?a meme-stock celebrity, which really is part of the deal.) A corporate plan of “I will do stuff to attract short sellers, and then try to get Redditors to squeeze the shorts, and my stock will rally to all-time highs and I’ll be able to raise infinite money and become an internet folk hero” seems like?a crazy strategy.
But a year ago it was not a strategy at all; a year ago, if I had written those words, you wouldn’t have even understood what I meant. “No no no attracting short sellers makes your stock go down, not up,” you would have patiently explained to me. Things have changed. Now the conventional approach —?do good business things to please analysts and institutional investors —?is just one option, and the other option —?do?weird?business things to enrage short sellers and entertain Redditors —?seems to be working better. If you are a CEO, don’t you have to consider it?
Usually, if a stock trades at $50, it is more expensive to buy a put option allowing you to sell the stock at $40 than it is to buy a call option allowing you to buy the stock at $60. I mean that it is?“more expensive” in the options-pricing sense: The put option will have a higher implied volatility; when you plug inputs into the Black-Scholes formula to get the price of the option, you’ll use a higher volatility input for the $40 put than you will for the $60 call. Using a higher volatility will make the price of the option higher than a lower volatility would. You’d use an even higher volatility for a $30 put than for the $40 put, and an even lower one for a $70 call than for the $60 call. (The $30 put will cost fewer dollars?than the $40 put, because it is more out-of-the-money, but it will be “more expensive” in the sense of implied volatility.) The implied volatility of a stock option generally goes up as the strike price goes down. This is called “skew.”
There are two intuitive ways to think about?skew. One is a sort of conditional-realized-volatility explanation: Usually volatility goes up when stock prices go down, and goes down when prices go up.?“Stocks take the stairs up and the elevator down,” they say: Prices move down faster than they move up; panic acts faster than greed. So a falling stock is more volatile than a rising one.?Also small companies are volatile; when they become big companies —?when their shares become more valuable — they become less volatile. So if a stock is trading at $50 now, and you buy a call option struck at $80 because you think it will go to $80, you also probably think that?it will be less volatile?when it gets to $80. If you buy a put option struck at $20 because you think it will go to $20, you also probably think that?it will be more volatile?when it gets to $20. So the implied volatility of a $20-strike put should be higher than the implied volatility of an $80-strike call, because the stock will be more volatile at $20 than at $80.
The other explanation is about?supply and demand for options: People mostly want to?buy?options to protect themselves against a market decline, so they buy lots of $20 put options. People mostly want to?sell?options to get some extra yield out of their current positions with buy-write programs, so they sell lots of $80 call options. So the price of low-strike put options gets pushed up and the price of high-strike call options gets pushed down, so implied volatility decreases as the strike price increases.?
This relationship has existed since 1987. But now it is breaking down. Here is a Wall Street Journal article about how skew is inverting in meme stocks:
Implied volatility, a measure of how turbulent traders expect stocks to be over a given time frame, typically drops as stocks go up,and climbs when they fall.
Some of the meme stocks have defied those expectations. As AMC share prices hit a record last week, implied volatility for the stock jumped to the highest level in around four months, according to Susquehanna Financial Group. …
And typically, investors pay more to protect themselves from stock declines than they do for bullish wagers. That hasn’t been the case at times in meme stocks and a handful of other bets over the past year, like some special-purpose acquisition companies, analysts said.
“These traditional relationships between volatility and stocks have been turned on their heads in meme stocks,” said Chris Murphy, co-head of derivatives strategy at Susquehanna.
With meme stocks neither of the traditional explanations quite works. Meme stocks become more volatile as they go up: A small stock might be fairly volatile, but a small stock that is rocketing to the moon is much more volatile. AMC’s realized?volatility over the last 12 months —?the actual amount it has bounced around on a daily basis —?is 233%; a year ago that number was 106%. AMC closed yesterday at $55.05; it closed a year ago at $5.99. The stock is up almost tenfold and volatility has doubled. Not how it’s supposed to work!?
Also meme-stock investors love buying far-out-of-the-money call options, both as a way to make big levered bets and as a way to?manipulate the price of the underlying stock. On the other hand they are not looking to get?insurance?by buying puts. (Though some number of meme-stock skeptics will bet?against?them by buying puts.)?So there is a ton of demand for out-of-the-money calls and less demand for out-of-the-money puts, so the supply-and-demand explanation for skew is reversed.?
And so for instance AMC?$80 strike calls expiring on July 16 are trading at an implied volatility of around 306%; July 16 $44 strike puts are trading at around 282%. GameStop July 16 $400 strike calls trade at around 200% implied volatility; $200 strike puts trade at around 184%. Normally?it would be the opposite, and it still is in most stocks. Microsoft Corp. July 16 $300 calls trade at about 24%, $200 puts trade at about 39%.?But meme stocks don’t work like most stocks.?
Elsewhere, here is a claim that the people buying high-strike AMC call options are actually doing it because they are selling call spreads, as a relatively sane way to bet against the stock.?
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Yesterday a lot of the internet was down for a while because of an “undiscovered software bug” at Fastly Inc., “a provider of content delivery technology that is designed to accelerate online streaming and loading speeds.” Let’s say you knew about the bug in advance; in fact, let’s say that you are an evil hacker and you?put?the bug there in order to cause havoc. (To be clear, we are just pretending; in fact the bug seems to have been a normal innocent mistake.) You were like “hahahaha I will bring Fastly to its knees and expose its technological problems!” How would you?profit?from your stroke of evil genius? The obvious move is to bet against Fastly’s stock. Fastly is publicly traded; you could short the stock, launch your bug, break Fastly for a while, and then profit as its price plunged in reaction to the disaster.
Hahahaha no just kidding that would not have worked at all:
Shares in Fastly, the internet infrastructure company whose bungle took down thousands of popular websites around the world on Tuesday, rose 11 per cent in the aftermath of the outage. …
Though its shares initially fell as news broke of the widespread interruption to media companies, streaming services and ecommerce platforms, the strong recovery suggests that investors may have been impressed by the speed with which Fastly fixed the issue. …
The strong response by investors may also reflect the number of big-name companies that the outage revealed as Fastly customers, including Amazon-owned Twitch, Spotify, Stripe and Shopify, as well as media companies including the BBC, The New York Times, CNN and the Financial Times.
Right? Here is Fastly’s elevator pitch for its business:
Developers are reinventing the way we live, work, and play online. Yet they repeatedly encounter innovation barriers when delivering modern digital experiences. Expectations for digital experiences are at an all-time high; they must be fast, secure, and highly personalized. If they aren’t reliable, end-users simply take their business elsewhere. The challenge today is enabling developers to deliver a modern digital experience while simultaneously providing scale, security, and performance. We built our edge cloud platform to solve this problem.
Pretty boring! Here’s its implicit pitch after yesterday:
We have some boxes. Half of the wires that make up the internet run through our boxes. If we turn off our boxes, the internet stops working. Think for a minute about what we could do with that power.
Not even in a bad way, just, like, “we are essential infrastructure for the internet you use every day, and you can’t get to?Amazon or Reddit or Spotify without us”?is a crisper and better pitch than “deliver a modern digital experience while simultaneously providing scale, security, and performance.” If half the internet runs through you there is probably a way to make money come out. Not necessarily! I know nothing about this business and for all I know it is highly commoditized and customers can switch in a day. But just, like, heuristically, if you wake up one day to find that a company you’ve never heard of controls half the internet, then that company is more important?than you thought, and maybe you should buy it.
Apparently the Federal Bureau of Investigation built an encrypted messaging device?called Anom and distributed it to criminals around the world, who then used it to do their secure communications about crimes. But the device also sent an unencrypted copy of all their communications to the FBI, which then read them. This is very cool!?
Apparently this device was mainly popular abroad, so the 800 people arrested based on its intelligence were mostly not in the U.S. Most of them were arrested and charged for, you know, regular crimes. They (allegedly) dealt drugs or sold weapons or took bribes or did murders or whatever, and they chatted about it on the FBI’s Anom app, and the FBI read their chats and told their local police forces and they were arrested. The Justice Department has some stats:
Grand totals for the entire investigation include 800 arrests; and seizures of more than 8 tons of cocaine; 22 tons of marijuana; 2 tons of methamphetamine/amphetamine; six tons of precursor chemicals; 250 firearms; and more than $48 million in various worldwide currencies. Dozens of public corruption cases have been initiated over the course of the investigation. And, during the course of the investigation, more than 50 clandestine drug labs have been dismantled. One of the labs hit yesterday was one of the largest clandestine labs in German history.
Fine, cool, great. Here is one weird thing though:
In the U.S., the FBI charged 17 foreign nationals operating in places including Australia, the Netherlands and Spain with distributing encrypted Anom communications devices, saying they violated federal racketeering laws typically used to target organized-crime groups, officials said. Eight of those individuals are in custody and nine remain at large, they said.
The FBI got lots of intelligence about real crimes done abroad, and referred it to foreign authorities, who arrested people for those real crimes.?But the people charged?by the U.S.?are not charged with doing murder or drug dealing or bribes or whatever. They are charged with?distributing the FBI’s spying device. The FBI built an encrypted-messaging-service-slash-spying-device, which would only be useful to the FBI if it could get it into the hands of criminals. So it subcontracted, as it were, some people to distribute the device widely to criminals. And those subcontractors did a good job and got the device in the hands of many criminals, and the FBI spied on them and arrested a lot of them.
And then it arrested the subcontractors! For doing what the FBI wanted! For helping the FBI catch criminals! Here is the indictment, which charges them with participating in a criminal enterprise, specifically “The ANOM ENTERPRISE,” an enterprise which …?the FBI .. ran? This seems very unsporting. Surely you want to reward them, no?
Here’s a question for you:
Imagine betting on a horse in a race without properly knowing the past performance or rankings of the horses involved in the race. You could choose to bet your money on a horse called?Sonic Thunder?or on a horse called?Brian the Snail. On which horse would you bet?
I would bet on Brian the Snail, wouldn’t you? I have read Nassim Taleb, and studies about investment managers. If you know only that (1) there is a horse race and (2) Sonic Thunder and Brian the Snail are?racing in it, it is reasonable to assume that Brian the Snail, with his silly slow?name, had to work harder and run faster just to get into the race, while Sonic Thunder probably just moseyed in based on his awesome name. At some point some trainer somewhere was like “hmm Sonic Thunder ran backwards in that race but I am going to give him another chance because Sonic Thunder goes boom,” while some other trainer was dragged grudgingly to watch Brian the Snail work out on some dingy fourth-rate track and was like “wait Brian the Snail is the fastest horse I’ve ever seen.” Someone paid an entry fee for both of these horses, and it was harder to get them to pay an entry fee for Brian the Snail, which means that Brian the Snail wanted it more.
I suppose the counter-argument is that, when you name a horse, you don’t necessarily know how fast he is but you do know how fast his parents are? Like if you breed two slow horses together and they have a foal you call him Brian the Snail? Of course presumably you’re only breeding fast parents anyway, if you’re trying to breed racehorsesI do not actually know much about horse breeding.
Anyway it turns out that my betting instinct is correct but unpopular. The question is quoted from “Sonic Thunder vs. Brian the Snail: Are people affected by uninformative racehorse names?” by Oliver Merz, Raphael Flepp and Egon Franck,?forthcoming in the Journal of Behavioral and Experimental Economics. Here is the abstract:
This paper examines whether individuals’ decision making is affected by fast-sounding horse names in a betting exchange market environment. In horse racing, the name of a horse does not depend on the horse's performance and is thus uninformative. If positive affect towards fast-sounding horse names is present, we expect less accurate prices, i.e., winning probabilities, and lower returns due to the increased demand for these bets. Using over 3 million horse bets, we find evidence that the winning probabilities of bets on horses with fast-sounding names are overstated, which impairs the prediction accuracy of such bets. This finding implies that prices in betting exchange markets are distorted by incorporating affective, misleading information from a horse's fast-sounding name. Consequently, this bias translates into significantly lower betting returns for horses with names classified as fast-sounding compared to the returns for all other horses.
We talk from time to time around here?about stocks that go up because people like their tickers; same basic idea really. Anyway there is not actually a Slow Racehorse Name Arbitrage due to transaction costs:
A simple trading strategy of betting against all horses classified as fast-sounding yields a return of approximately 2.9% before the commission but a negative return of ?1.6% after deducting the standard commission of 5% from Betfair. This finding could be bracketed under the “limits of arbitrage” argument of Gromb and Vayanos (2010) because the mispricing is not large enough to overcome the transaction costs; thus, potentially misleading or false information is not fully eliminated from prices. Nevertheless, this strategy generates significantly larger returns than a random betting strategy in which approximately zero returns are achieved before commission and a negative return of ?4.7% is achieved after the commission is considered. Despite wagering real money, a substantial share of the betting community seems to be systematically biased in preferring bets on fast-sounding horses over bets on other horses.
Honestly this is good advice for an academic career:
We use publicly available data to show that published papers in top psychology, economics, and general interest journals that fail to replicate are cited more than those that replicate. This difference in citation does not change after the publication of the failure to replicate. Only 12% of postreplication citations of nonreplicable findings acknowledge the replication failure. Existing evidence also shows that experts predict well which papers will be replicated. Given this prediction, why are nonreplicable papers accepted for publication in the first place? A possible answer is that the review team faces a trade-off. When the results are more “interesting,” they apply lower standards regarding their reproducibility.
That’s the abstract to “Nonreplicable publications are cited more than replicable ones,” by Marta Serra-Garcia and Uri Gneezy, in Science Advances. I assume the analysis here is:
Some scientific results are too good to be true. These results are good. But not true. People like good results, and are not that bothered when they turn out not to be true.
“Se non è vero, è molto ben trovato.” The career advice is that if you have the choice of writing an interesting paper that might not be true, or a true paper that definitely isn’t interesting …?look, you do what you want, your scientific ethics are your business, all I can do is point you to what the literature says. The literature says that your interesting paper will be cited more and, if it turns out not to replicate, people will probably be cool with that.
This result strikes me as interesting, so obviously a fun project would be to see if it replicates.
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 Even Tesla Inc., in some ways the grandfather of meme stocks, mostly fits this pattern. It’s not that it is unloved by the rest of the market and only popular on Reddit, but it *has* frequently been a heavily shorted stock and its operating performance has rarely kept up with its stock price. The basic story —?not liking short sellers, being offended when people talk about fundamentals —?still applies.
 Except of course for Elon Musk, the CEO of Tesla, which again supports my point.?
 The net loss for the fiscal year ended Jan. 30, 2021 (fiscal year 2020, the last financials reported),?was $215.3 million.?The net loss for fiscal 2019 was $470.9 million, of which roughly $165.7 million came before Sherman started in mid-April. GameStop will report last quarter’s earnings today after the close.
 Hindenburg published that report in early February, at the height of the GameStop frenzy, and sensibly announced: “We have no position (short or long) in Clover Health because we think in this moment for public markets, it is more important for people to understand the role short sellers play in exposing fraud and corporate malfeasance.” But obviously Clover *has* been shorted, though not actually that much: “A proxy measure of short-interest, the percentage of shares outstanding on loan, is at 9.7%, according to data from IHS Markit. While this has more than doubled from March, it is far below levels previously seen for stocks such as GameStop, which was above 80% in January.” To become a meme stock, the important thing is that your stock is publicly shorted and that people get mad at the short sellers —?not that there’s actually that much short interest.
 The Black-Scholes formula itself sort of assumes constant volatility: The volatility input for the option is meant to be the future volatility of the stock at all times and all strike prices. This assumption is of course unrealistic, but it is broadly good enough for most vanilla-option-pricing purposes. In the early days of Black-Scholes —?as the lore has it, it’s not like I was there —?this assumption was taken as true-ish, and if one option on a stock traded at a 35 implied vol and another option on the same stock traded at 30, that was considered an arbitrage: You could buy the 30 option and sell the 35 option and make a riskless spread of 5 vol points. After Black Monday, people realized that it was not in fact an arbitrage, and that the lower-strike option probably *should* trade at a higher vol.
 This is from Bloomberg page AMC US HVT, using 260-day historical volatility. (The traditional number of trading days in a year is about 260.)?
 Source is Bloomberg’s AMC US OMON at around 11 a.m. today, under the IVM (midpoint implied vol) heading.?
 You should not do this, of course; that is the Fifth Law of Insider Trading.
 They don’t really address the possibility, which I suggested above, that owners might name horses based on their *expectations* of future speed. They just assert: “Importantly, the name of a horse such as Sonic Thunder or Brian the Snail is completely uninformative because the regulations concerning the naming of a horse do not consider past success. Rather, the name of a horse usually cannot be changed after the horse has started participating in races.” But what if the horse runs really slowly in training and you give him a slow name?
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.