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In this edition of the Alpha Letter, we cover:
Stocks & Options: AMC & GME jumped Tuesday. What does the option flow tell us?
Crypto: Is Tether a scam?
Stocks & Options
AMC and GameStop had great days yesterday. AMC went up 18% to $16.41 and GameStop closed at $209.43, up 16%. For GameStop, that’s its highest closing price since early March, and the highest for AMC since the short squeeze in late January.
AMC and GME option volume was off the charts Tuesday. Among stocks in the Russell 2000, GameStop and AMC option premium traded was nearly 10x the amount of any other stock.
Here is the option volume for the top five most active names in the Russell 2000 on Tuesday:
Option flow courtesy of the Vigtec Option Matrix. Check out their 7-day free trial here.
GameStop call premium was enormous; $213 million in calls compared to just $54 million in puts is very bullish.
If you were watching the option flow yesterday morning, you would have seen a clear signal to buy. GameStop only gapped up 1% or so at the open, so you could’ve bought during the day and made some good money.
The option flow yesterday morning was showing extremely bullish signs. Call volume and call premium traded were much higher than puts and higher than the average for the last few weeks.
Sure enough, GameStop popped 5% in the morning and another 10% in the afternoon.
When you watch the option flow, you sometimes get very clear buying signals.
What does the option flow tell us is going to happen next?
To find that out, we’ll have to look at the option flow from the end of the day. The overall option data from Tuesday isn’t necessarily helpful for determining what will happen Wednesday and Thursday because a lot of those trades are now outdated.
Looking at the trade tape from the end of the day, I’m still seeing a lot of calls being purchased. Here’s what it looked like on the Options Matrix:
A majority of the trades just before close were bullish call bets, but there are some large put trades in there as well.
One trade doesn’t tell us much; we have no idea if the trader is hedging or taking a naked position, so it’s impossible for one trade to accurately inform our view of a stock. But if the market volume is 70% or 80% calls with high open interest, that gives us a bullish signal.
I’m also seeing high volume in out-of-the-money call options. Several calls with strikes of $300 to $400 were in the $1 million+ range for premium traded on Tuesday. This is definitely a bullish sign for a potential gamma squeeze.
For example, the January 2022 $420 strike calls saw $2.66 million in premium traded on Tuesday.
Want to find these insights for yourself? Be sure to check out the Options Matrix and watch the GME and AMC option activity first thing in the morning. It will tell you if you should be buying or waiting for a better entry point.
Is Tether a scam?
Jim Cramer started asking that question on Twitter this week and got a wide variety of answers.
Tether is a cryptocurrency that acts as Bitcoin’s “tether” to the US dollars. Originally, the idea was that Tether would hold $1 US Dollar for every $1 that Bitcoin is worth (or at least $1 for every dollar of value held in Bitcoin under Tether’s purvey).
In 2019, the company that issues Tether clarified that it actually holds the equivalent value in US dollars AND commercial paper that it issues.
Many have questioned if Tether really is backed by the US dollars and commercial paper it claims. The underlying organization is somewhat opaque and details on its holdings are hard to find.
Here are a few of the conjectures people made under Cramer’s question:
Here is a more detailed thread that outlines potential issues with Tether:
Bennett Tomlin @BennettTomlinTether and Bitfinex are Unacceptable: The Fundamental Divide https://t.co/QUScXcp4Je
At the end of the day, we won’t be able to definitively give an answer to this question. No one besides the people working on Tether knows what’s really going on behind the scenes.
Large scale fraud is very difficult to unmask, especially for outsiders, because management purposefully fabricates the truth to perpetuate the fraud. Only a very small percentage of people working with Enron knew about the widespread fraud within the company before it was found out.
I think the bottom line is that you need to read the available information on Tether, both positive and negative, and decide if you’re comfortable keeping money in it. You won’t be able to figure out with 100% confidence if it’s fraudulent or not as an outsider, but the best you can do is decide for yourself where to keep your money.
New Update for Subscribers
We published a new post to subscribers yesterday after the market close. The stock price of this company has ran up about 3x from its 2020 lows but we still think the stock has at least 50-75% upside over the next 12 months as the economy fully reopens. Here is the break down of our pitch.
Company X is a movie theater and hotel owner/operator with a $625 million market cap and $940 million enterprise value.
Company X operates 88 movie theaters of which 49 are fully owned. In a normalized period the theater segment generates $550 million in revenues and $130 million in EBITDA.
Company X owns and operates six luxury hotels that are unlevered and manages an additional nine other hotel properties. In a normalized period the hotel properties generate $265 million in revenues and $34 million in EBITDA.
Company X is selling $10-40 million in excess real estate over the next 12 months and should be receiving over $25 million in CARES Act refunds back from the Federal Government in Q2.
The economy should be fully reopened by the Summer of 2021. Should the reopening occur there are a large slate of movies which will drive operating results in the near-term.
Cash burn was only at $14 million in Q1 2021 and should come down to zero over the next two quarters. Company X has ample liquidity to survive the rest of the downturn.
Any valuation method will yield substantial upside from here. Company X traded at $45/share in 2019. The stock should re-rate above $30 as new movies are released and individuals start traveling again.
To get full access to our research report subscribe today.