Just when we thought the meme stock mania was behind us, a cryptic tweet from “Roaring Kitty,” whose legal name is Keith Gill, triggered a massive rally in meme stocks, especially GameStop (NYSE: GME) and AMC Entertainment Holdings (NYSE: AMC). Many were quick to assume that this was simply another organic movement, but some experts are flagging suspicious options trades before the explosion, suggesting that someone may have engineered this rally.

As was the case last time, while some traders made big money from the meme stock rally (and short sellers lost massively), many more traders were burnt as the stocks have since crashed from their peaks. Here’s what drove the rally and why it wasn’t as spontaneous a reaction to Roaring Kitty’s tweet as some might want to believe.

In his note, Interactive Brokers market strategist Steve Sosnick highlighted that prior to Roaring Kitty’s tweet, there was a massive open interest build-up in deep out-of-the-money call options on GME.

Open Interest in GME Calls Surged Prior to the Pump

For the uninitiated, a call option gives the buyer a right (but not the obligation) to buy 100 shares of a stock at a certain price called the strike price. A call option is out of money when the strike price is higher than the prevailing stock price. It becomes deep out-of-the-money when the strike price is considerably above the prevailing stock price. These, as you might expect, are much cheaper because they are less likely to ever reach the strike price before expiration.

While the volumes in deep out-of-the-money options are typically low, Sosnick’s analysis shows that towards the end of April, there was a massive buying in $25 and $30 calls on GME which were set to expire on May 17.

The only way anyone buying these calls would have made money was if GME stock – which was trading at just above $11 towards the end of April – rose steeply.

Clearly, someone made an extremely risky bet that GME was set to explode before May 17, and that’s exactly what happened. Those holding these call options look set for great payoffs, assuming they did not sell it before the rally.

In his note, Sosnick said, “A suspicious person might wonder why “Roaring Kitty” chose to return to social media today. Given my past experience in analyzing the periodic bouts of meme stock activity, consider me suspicious.”

Another Bed, Bath, and Beyond in the Making?

Sosnick drew parallels with Bed, Bath, and Beyond – another one-time favorite meme stock that had the backing of Ryan Cohen who is also the biggest shareholder of GameStop. Bed, Bath, and Beyond stock rallied when Cohen disclosed his stake but it plummeted immediately after he disclosed in a filing in 2022 that he would exit the company.

Cohen made a cool $60 million profit on his investment in the company. A lot of retail traders were angry with Cohen for exiting the company but as things turned out, selling out of the loss-making retailer turned out to be a prudent decision for Cohen as Bed, Bath, and Beyond filed for bankruptcy last year. Most retail traders were not as “visionary” as Cohen and (as always) ended up losing money.

Commenting on Bed, Bath, and Beyond in August 2022, Sosnick wrote, “if you participate in these period[ic] rallies and trade them profitably, congratulations. If you notice the eruptions only after they are in full flourish, please be careful.”

Comparing it with the recent rally in GME and other meme stocks, he said, “This was a profitable play for many and treacherous for many more. But it has returned once again, only with shorter opportunities for outsized profits.”

Notably, while GME’s rally came to a halt, some traders were still buying deep out-of-the-money GME calls and now it seems like they are set to lose big time judging by the stock’s price action.

Pump and Dump Guys Seldom Get Punished

The recent rally in meme stocks certainly made at least a few people money. However, the most profit was made by those who got into GME call options ahead of the run-up. While we can’t be certain whether these entities had anything to do with that “Roaring Kitty” tweet, it’s a bit hard to believe that someone was buying such deep out-of-the-money call options without having any information that others didn’t have.

But then, in such pump-and-dump schemes, the scammers are rarely caught. During the 2021 meme stock mania when GME and AMC were rising, thousands of influencers and celebrities like Elon Musk and Chamath Palihapitiya Tweeted about the stocks, helping to inflate them further.

None of the influencers pushing these stocks faced the legal heat as well, even though many likely tried to cash in. As for the meme companies, they made the most of the rally and issued new shares in a frenzy. For context, GME became a debt-free company while SNDL, a little-known cannabis company, raised more than enough cash to lend it to others.

AMC also managed to bring down its debt burden and despite its high leverage it invested in Hycroft Mining, a Nevada gold and silver miner. The company incidentally yet again capitalized on the rally in its shares and raised $250 million by selling shares earlier this week.

These pump-and-dump stories usually end on a very bad note. One pertinent example here could be AMTD Digital which outwitted all the other meme stocks with its humongous rally in 2022, which took its market cap above $400 billion. For those wondering what’s the stock worth now; It’s a penny stock with a market cap of just around $720 million.

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What’s Next for GME Stock?

Coming back to GME, the company’s turnaround remains a work in progress as Cohen tries to revamp the business. GME’s core gaming business is facing structural headwinds and while Cohen hired several tech executives – some of whom have either quit or have been asked to leave – GME is far from becoming a tech company (and attracting those valuations.)

After the recent rally, GME stock trades at a next 12-month price to earnings (PE) multiple of around 4,000x – and one need not be a financial wizard to gauge that these numbers are simply unsustainable in the long term. The real question is how long it could last before the market becomes rational again.

The rally in GME stock has started to fizzle away and it would be apt to quote from Sosnick’s note, “if you can’t spot the sucker at the poker table, it’s probably you.”

As for those who might have profiteered by the GME trade at the cost of many others, the law might look the other way around this time also.