Now that we have discussed Total Return Swaps in our last post, we can go further down the rabbit hole and evaluate Portfolio Swaps and how they pertain to our favorite topic, “Meme” stocks.
Beyond an Equity Total Return Swap is something called a “Portfolio Swap”. This is basically a basket of Equity Total Return Swaps. Read the below and think of how all the “meme stocks” move in tandem:
There’s a basket of “meme” stocks that move in tandem, signaling that some counterparty (or counterparties) are on the hook for a ton of swaps and that these “meme” stocks are most likely shorted as a basket through Equity Total Return Swaps.
Here’s a sample of just a few stocks and how their prices are quite related. GME, AMC, KOSS, BBBY, EXPR:
The prevailing theory is there’s a massive amount of Portfolio Swaps against these meme stocks, where so many entities can be pulled under if these squeezes occur.
Which means many meme stocks can be decent squeeze plays. Because if the SHFs go down (and consequently the counterparties of the swap trades), then they liquidate all positions and buy back the short positions on these stocks. Many stocks can have massive short interest that is hidden through the swap derivatives.
But in my opinion, GameStop is the backbone to it all because it had an alleged reported SI% of 226% in January. Note that the 226% was reported SI. The shorts from the swaps are unreported.
GameStop had a massive reported SI. So it was, and is, the most overexposed short position of the SHFs. Melvin and other SHFs got cocky and shorted the stock directly rather than entering into swaps because it’s a more profitable bet. They exposed themselves to the world – significantly – and here we are.
That all being said, the swaps are just one part of the picture. The stocks are being shorted and have been shorted through ‘synthetic prime broker’ derivatives. We’ll take a look at Futures and Options in the next post.
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