3 experts speculate on the most profitable exit strategies and pitfalls of the options contracts turbocharging the Reddit account's GameStop holding by 376% (2024)

On June 6, the Reddit account followed up with another post showing gains of 119% on the spot position and almost 376% gain on the options contracts. With cash positions, the account sat at a total of $586 million, assuming all positions remain the same.

It raises the question of whether Gill has that much money or if there's someone else behind him, says Steve Sosnick, the chief strategist at Interactive Brokers.

Christopher Vecchio, CFA and head of futures and forex at Tastylive, the research arm of Tastytrade, points to a few possible explanations, including that someone may have purchased the Reddit account. But even if it is Gill behind the account, there's no way to know whether it's his money. Theoretically, someone could turn about $35 million into $211 million by making a series of intricate trades that would include shorting and options, but Vecchio doesn't believe that's likely.

"Perhaps there was someone out there who gave him a pile of cash and said, 'Do your thing; we get 20% of whatever you make. Have at it, kid'," Vecchio said. "That's not impossible."

The strategy

While the spot position is very large, the options part of the trade is what can turbocharge returns, Sosnick said. But they could also expire worthless. So Gill, or whoever owns the account, is expressing a very bullish position, he noted.

If the Reddit account is linked to Gill, Vecchio expects to see an increase in social media posts over the next week in an attempt to garner interest in supporting his position. On Thursday, Gill announced he would host his first YouTube livestream in three years.

Based on where GME was trading on Thursday at 12:30 p.m. ET, if the contracts were executed when the stock was near $34, the underlying shares would be purchased for $20, well below the spot price. But he would need a lot of cash to buy those shares. Alternatively, if the contracts were sold, they would have been offloaded at $14.63, more than double the average price paid of $5.68, Vecchio noted.

Holding on to the contracts longer increases the risk of loss because the stock's price could plunge anytime. Additionally, theta decay reduces their value as the contracts near their expiry date.

"So, if he wants to maximize his value, unless he thinks that the share price is going up immediately over the next few days, his best bet is to try to figure out a way to roll the position or to get out," Vecchio said. "And quite frankly, given how illiquid GME is, I think this is going to be very tough."

Vecchio has been tracking options contracts and hasn't seen signs of high-volume activity, indicating that large batches of options contracts are being sold.

"This is really odd. You're on the other side of the decay curve here, henceforth. Unless the stock continues to rally 3% to 5% a day, there will be automatic decay of the intrinsic value of the option," Vecchio said.

Where trouble lies ahead

Holding 120,000 calls on the 20 strike is a very large position relative to open interest for that batch of contracts. As of Friday, May 31, there were just over 145,000 in open interest on the 20 strike price expiring June 21, which means the Reddit account acquired over 80% of the volume, Sosnick said.

The problem with having a majority share of the open interest is that now you're a whale, and it will be difficult to exit without shifting the waters.

The bearish outcome is that if the account holder doesn't sell the contracts and the stock drops below $20 by June 21, the contracts will expire worthless. If the contracts are held to expiry, even if the calls are in-the-money, which means the strike is below the spot price, E-Trade could still choose to close all or part of the position in advance if there isn't enough cash in the account to exercise the options before expiry, Vecchio noted.

Tom Sosnoff, the cofounder of Thinkorswim and Tastytrade, told Business Insider that he has never seen anybody try to dump that many contracts of an illiquid stock that is that deep in the money. He believes that if the holder doesn't make any moves, the likely outcome is an automatic exercise. But E-Trade would need to decide before June 21 how much risk they want to take on this position.

"He's too smart for that," Sosnoff said of the possibility the account holder could end up in any of the above positions. "He's got too much profit. It's not going to happen that way."

Speculating on possible exit strategies

Assuming the position is real, and the Reddit account is holding all those options, they could exercise the contracts and end up with the shares well below market value.

However, there doesn't seem to be enough cash in the account to exercise all the contracts. If Gill doesn't get the cash from anywhere else, Sosnoff believes the holder will take some of it in stock and liquidate the rest of the calls.

"This guy's playing for a billion dollars," Sosnoff said. "He's not playing this thing for a short-term trade. He's already been there."

The contracts could be sold below their market value. Even if the position was most of the open interest, a $0.10 discount on the contract is very valuable considering where the stock's price is trading, Sosnoff said.

Vecchio noted that if the contracts were to be sold, it would need to be done in batches of 250 to 500 contracts over multiple days, hoping it wouldn't move the market.

Selling some stock positions could be a way to get the cash to exercise the calls, but that could spook other GME bag holders.

Sosnick says another way out is with a delta hedge, which would involve selling the shares short in the market and then covering the positions by exercising the options at the $20 strike.