The Battle of GameStop
The GameStop GME stock battle between the 'retail' Reddit's r/wallstreetbets buyers and hedge fund short-seller is bizarre.
The total short positions of the hedge fund and others is a spectacular 150% of the floated stock. At the same time, the stock is up 300% since January due to a short-squeeze triggered by the Reddit buyers.
This Friday there is an options expiration that could trigger another shorts squeeze due to calls with large open interest expiring in-the-money.
I've seen some extreme implied volatility plots, and decided to convert today's option price data into an implied probability distribution using Gaussian Mixture Fitting for the upcoming Friday's expiration. The implied probability distribution is the probability distribution of what the options market thinks will happen.
The main statistics of GameStop are the following; the current stock price is around $77. Now, there is a 5% implied probability that the stock expired below $24.20. There is also a 5% probability that it will expire above $183.00, ..and the median is at $59.20, ..which is just below the $60 strike that has a large open-interest!
How will this evolve?
This is such an extreme situation, and it's going to be very challenging for market makers to give option quotes.
How do you price this, will pricing models still work?
Written by Thijs van den Berg
Edited by Alexander Fleiss