The Return of Roaring Kitty - 8/14/24

The Cat is Back 

Around three years ago, at the height of the pandemic and while nearly every American citizen was receiving stimulus checks, one of the wildest events in the history of the stock market took place. A Reddit poster who went by the handle Roaring Kitty (real name Kieth Gill) issued a proclamation that he was investing a sizable chunk of money in a company called GameStop and encouraged his listeners to join him. 

GameStop is basically a brick-and-mortar retail business for video gaming enthusiasts. That’s not an industry I’m really familiar with but obviously, most of these types of businesses have gravitated to the internet. It sounds to me like going to Blockbuster to rent movies instead of simply streaming them, something that doesn’t make a lot of sense today. However, Roaring Kitty seemed genuinely enthusiastic about the company’s future and decided to put his money where his mouth was. 

But at the time, the company was basically on life support, and numerous hedge fund sharks, smelling blood in the water, piled on with bets that made it one of the most heavily shorted stocks in the market (meaning they made large bets that the stock would continue to fall, ultimately to zero).

Flush with stimulus checks, an army of Roaring Kitty’s followers opened trading accounts on a new discount platform, appropriately called Robin Hood, that catered to small, inexperienced investors as well as some with larger holdings looking for better deals on trading fees. 

Once Roaring Kitty’s army of small investors started buying shares of GameStop, the price began to rise and those companies with huge short positions found themselves in a legitimate financial nightmare, one where their losses were potentially infinite. This is known as a short squeeze.

When an investor buys a stock outright, the worst that can happen is it goes to zero. The most one can lose is the amount paid to purchase it. But if one takes a short position, the stock is borrowed at a certain price and must be replaced at some point. The bet is that the price will go down, and the shorter will re-purchase it at a lower price, and pocket the difference.

However, if that stock starts to go up in value, instead of down, it theoretically could result in losses with no limit, since hypothetically there is no ceiling. As the short sellers all scramble to buy the stock in an effort to exit their positions, the increase in demand drives the stock price up, resulting in the short squeeze…and these moves can happen so fast that an individual or large firm that’s overly leveraged can find itself completely broke in a matter of hours, or sometimes minutes before they’re able to exit. 

It’s a very dangerous strategy, usually only initiated by expert traders with hedges in case things go wrong. This actually happened to a firm called Melvin Capital thanks to Roaring Kitty and his minions three years ago. Melvin Capital held a large short position, doubled down as the stock rose, and then found itself having to liquidate.

There was a whole movie made about the Roaring Kitty/GameStop saga called “Dumb Money,” a reference to how large hedge funds view the average retail investor (ie you and me—dumb investors who are easily manipulated). What made all of this so fun to watch was the fact that Roaring Kitty was directly challenging hedge funds and beating them at their own game. He was able to turn the tables, simultaneously manipulating the price but playing within the rules (barely) just like Wall Street does on a regular basis. 

The story is that he made tens of millions from an original $50k investment, eventually exiting his positions then dropping off the radar and keeping a low profile. Having achieved legend status and more money than he could spend in his lifetime, most believed they’d seen the last of him. 

That is, until a few weeks ago. Out of the blue, three years later, he started posting memes on X…mysterious images that people immediately interpreted as signs that Roaring Kitty intended to make another run at the GameStop shorts, who by now were back in full force. 

Once he posted the wordless, obscure image of a man leaning forward in a chair staring at what looked like a video game, the stock instantly went parabolic. It then chopped around for a couple of weeks while everyone speculated as to whether it was really the Roaring Kitty posting. Some even thought he might have sold his social media accounts to a third party who was using them for nefarious purposes. 

A few days later, he went public and posted his actual position. And what a position it is… He currently holds 5M shares outright at an average of $21.28 ($106M), a huge bet for sure. But even more astonishingly, he’d purchased 120,000 call options contracts at an average of $5.20 and an expiration date of 6/21/24 (13 days from now.) One contract = 100 shares. 

If those options expire in 13 days below where he bought them ($5.20) they’ll be worthless and he will have lost $62.4M. As I write this, he’s up about $2 per option which makes them profitable by around $24M. However, at one point last Friday, his positions in both the stock and the call options combined hit $1 billion. 

Soon after, on Friday, GameStop announced they were issuing 75M shares in an effort to raise money, something that diluted the stock and couldn’t have been worse timing for Kitty’s trade, sending it crashing. The company also announced quarterly earnings which were lousy, something that didn’t help the stock. But as I write this (Tuesday) the price has rebounded again, now trading around $30. 

I won’t go into the mechanics of possible outcomes in the event the call options wind up going parabolic (way over the $5.2 per share he paid), but the ramifications could rattle some major financial institutions in ways never seen before. If his options are deep in the money he’ll have the choice of purchasing the shares outright for the option price of $20. Say the stock hits $60, his options could be worth $720M and the 5M shares of stock $300M. On 5/14 the price hit $64. As of now, it’s dropped back down to around $30. 

And there’s some question around just how the market might fulfill that requirement to supply what would amount to 12M shares which his call options would convert to. 

In contrast, as I said earlier, if the call options expire worthless, his $62.4M will evaporate. He’ll still own the 5M shares outright, the value of which will be dependent on the market at the time he decides to sell them. 

But with the options expiration looming, this is going to be one of the most watched events in the history of the market.

Buckle up and stay tuned. This is going to be a wild couple of weeks! Either way, this whole story will be talked about by millions of people all over the world and no doubt studied in university business classes for decades.

Let me know what you think!

COMING SOON!