How I Knew GameStop Would Collapse | Smart Change: Personal Finance

Why I wasn’t sure when it would happen

While the mechanics of the options situation should have been perfectly clear to any savvy investors who were paying attention, there was still plenty of mania surrounding the company last weekend. The New York Times and The Wall Street Journal had both recently run pieces on the phenomenon, and it was all over the television and internet news.

It was unclear how many additional people were going to be sucked into the GameStop vortex by those news pieces that trumpeted how ordinary investors were taking down hedge funds. Despite the very real financial overhang and incredible risks priced into the stock and its options, it was very possible that all that news could have pulled even more people and money into the stock. That could have caused the stock to continue rising, even further disconnected from the company’s underlying financials.

The problem is that fulfilling those options contracts only gets more expensive the higher the stock price reaches. While a $300 options contract costs $30,000 to fulfill, a $600 options contract costs $60,000. The higher the price, the less likely that an investor has that much spare cash lying around to successfully take possession of those shares. That meant the gamma squeeze mania had to end at some point, even if more people had gotten sucked into it. It just wasn’t clear when it would end.