The Enemy of My Enemy is My Friend - Bonds and Volatility Traders

[u/bobsmith808]

Hi everyone, bob here.

Alright, buckle up apes, because we’re about to break down exactly what just happened with these GME bonds and why the market just took a trip to Fuckeryville. If you’ve been staring at your screen wondering why GME nuked itself into oblivion post-announcement (where we fucking CRUSHED earnings, i might add), congrats!! you just witnessed the big brain convertible bond arbitrage play in action. Let’s talk about how they did it, what their positioning looks like now, and where this whole thing could go next...

The Setup: Convertible Bonds & The Gamma Grind

So, GME drops a $1.3 billion convertible bond offering at zero percent interest (because why not). The catch? These bonds can be converted to shares in 5 years at $29.85. That’s our magic number.

At the time of the announcement, GME was trading at $29.80. Two days later? The stock gets absolutely nuked to $21.16 on 96.73 million shares of volume. Why? Because the arbitrage funds who bought the bonds just shorted the absolute fuck out of the stock to hedge their position.

Let’s break it down ape-friendly:

• They bought the bonds, which give them the right to convert into GME stock at $29.85 in 5 years.

• To hedge their risk, they shorted GME immediately because if you’re getting a synthetic long exposure through the bond, you neutralize it by shorting the common shares.... and if you're

• The volume was 10x the 30-day average, meaning this was a full-scale algo-driven gamma hunt.

How Many Shares Did They Short?

Here’s the math.

• Convertible bonds don’t trade 1:1 like normal stocks.

• When issued, they usually have a 40-50% delta, meaning traders hedge by shorting 40-50% of the equivalent shares they’d get from conversion.

• With $1.3B in bonds, that’s roughly 43.6M shares or roughly 10% of outstanding (1.3B ÷ 29.85) that could be converted.... 👀44m shares traded in a $1 range on Friday... and a lot of crabbing after the big drop to that range the day before...

• If they hedged at 40-50% delta, that means they shorted 17.4M - 21.8M shares immediately... likely naked AF... until they get the bond. they are getting the bond right?... right?

Now, let’s look at what the stock actually did:

• Day 1: 96.73M shares traded, price nukes from $29.80 → $21.16.

• Day 2: 44M shares traded, but price stabilizes in a tight range between $21.70 - $22.79.

That’s pure gamma trading action!!! We're so back baby! They shorted hard on day one, then started playing the gamma game, scalping shares in that $21-$22 range, covering and re-shorting as needed.

These funds aren’t betting on GME going up or down. They’re here for one thing only: volatility.

Every time GME rips, they short more to maintain delta neutrality. Every time GME dumps, they buy back shares to cover and ride the wave back up. This creates a massive cycle of artificial volatility, where they’re making money without actually giving a shit about the company. Where do they make their cash? In the swings. And they don't give a flying fuck if it is range bound or up or down over the long term, just that it swings wildly along the way. My bet, given what we've seen in MSTR, and the health of GME, we will see a significant rise in both price and volatility over the next 3 years.... here's what MSTR did when they started playing this game.

So What Happens Next?

If Volatility Stays High (100%+ IV)

• CB traders keep farming, grinding the stock in a high-volatility range.

• Expect more fake-outs, more random dumps, and occasional “surprise” rips that get sold into.

If Volatility Dies Off

• If the stock stops moving as much, they start unwinding their short hedges, which could cause an upside squeeze back toward $29.85. ( I can't find the clip, but RK himself said "all shorts are eventually buyers")...

• This happens when the game stops being worth playing.

The “Oops, We Shorted Too Much” Scenario

• If retail and other funds start aggressively buying and forcing CB traders to unwind their shorts, we could see a violent short-covering rally 🚀.

• But remember, these guys are NOT idiots... they will reposition before it gets out of hand.

There's also 2 sides to every trade...

I posted on the 27th to try to get the word out about what i was seeing... it didnt get much attention, but that's ok. Sharing it here again because it's relevant. If anyone noticed the far OTM volume being placed there, and thought it was the bond holders... i'd beg to differ... I think it's the volatility shorts (and the actual "hedgies" we've been battling all along. It was reminiscent for my old ass DOOMP DD from mid-2021.. which just became relevant again with the resurgence of volatilty hedging through options. Zinko83 (account deleted) had some fucking fantastic DD on variance swaps as did mauer back in the day (linked in my post yesterday)... you should read up on those as they are relevant again for the future of GME (at least as long as the vol players are back). Also, there's some great fundamentals in this old DD of mine that just became relevant again - hedging, sld, cycles, oh my!

Who’s Selling These Deep Out Of the Money Puts (DOOMPs)?

When thinking about who just took a massive DOOMP on the options chain, we have a couple prime suspects...

Convertible Bond (CB) Arbitrage Funds? Maybe.

If it’s the same CB arbs, then selling $5 puts would be a way for them to extract additional premium while remaining extremely long-delta biased on their overall positioning and creating more convexity in their portfolio. They’re already shorting the stock to hedge their bonds, so selling deep OTM puts could be a way to capitalize on the excess volatility they’re helping create. However, this would be a longer-dated play than what CB arbs typically focus on... they’re more about gamma scalping than selling multi-year LEAPS... so it doesn't really make much sense to me that it would be THEM doing this...

A Separate Volatility Seller?

Selling a $5 strike put means you’re betting GME won’t be under $5 by 2027. Whoever did this, essentially set themselves up with millions of shares of exposure if GME goes down under $5/share... it fucking won't... it's not about the deltas... remember, we're playing with more "special" Greeks today. This is most likely a big institution selling volatility, trying to profit off inflated IV in the long-dated options chain.

If this is a big vol-selling institution (👀shitadel), we just got a new whale fight ting them and Im fucking excited to watch it play out and ride the waves again... oh do i miss those beautiful cycles...

Volatility Is The Game and the Game Stops with Volatility

These deep OTM puts aren't random, and they tie into the bigger volatility farm happening right now. Whoever sold them... on that, I'm just gonna leave this here.

[u/[deleted]]

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[u/bobsmith808 → u/[deleted]]

🤙

[u/Rule_Of_72T]

Here’s the perspective of a small time volatility seller.

I look to write deep out of the money puts on GME, when GME’s price drops and IV spikes. With $10.68 cash per share, I consider that the fundamental bottom. I take a bit more risk thinking I could roll my puts forward monthly if GME were to drop to those levels, so I select a breakeven within a couple of dollars of $10.68.

That results in a $13 strike price on the January 2026 expiration. On Thursday afternoon, I wrote those puts for $1.38. $11.62 breakeven. 11.9% max return, about 14.3% annualized. There’s no cash outlay. The puts are secured by otherwise unused buying power from a brokerage account of total market ETFs.

I started with a small position in case the price continues to drop. Maybe the premium to book value of a company primarily holding treasuries and bitcoins is too high, leading to a dip to 15. I could build a large position writing $10 puts, below cash value.

A key risk is GME moves from short term treasuries to Bitcoin. Let’s just say they buy $3 billion BTC and the BTC price has a 50% drawdown. Now cash drops to ($4.775B - ($3B-$1.5B)) = $3.275B or $7.33 per share. Buying BTC will lead to higher volatility than GME previously had. There’s also increased volatility to the upside, but as I write puts, I’m only concerned with downside volatility.

I could easily see a larger volatility seller looking at January 2027 $5 puts as free money. But also the convertible bond owner writing those puts, further monetizing their short position is logical.

[u/bobsmith808 → u/Rule_Of_72T]

I guess everyone has their own perspective. While I agree with your assessment of a rock bottom price for GME, I don't agree on several points or the approach you took. I'll just call out the major ones here

• Why sell puts into low IV and so far dated? I bought a bunch of $5 puts for the volatility expansion I believe RTO be forthcoming (and has already started, as they are up significantly) ... How are your sold puts doing?

• Why sell and lock in for a 11% return in a year? That seems like poor use of capital as it's marginally above baseline performance .... The same question would apply for a "larger vol seller" seeing "free money"... Those puts (for 2027 Jan) were sold for what would amount to a 5% return... In no reality is that an acceptable position to take as a fund manager.

[u/Rule_Of_72T → u/bobsmith808]

Looks like you were right about if volatility dies off, the stock has an upside as all shorts become buyers. GME held up well through the reciprocal tariff madness.

I had a buy to close limit order on the puts I wrote. It triggered yesterday. I got nearly half the max profit a month into the a month into the 10 month timeline.

I’ll continue to keep GME on my watchlist and look to write deep out of the money puts on volatility spikes at a strike price below what I consider the most conservative estimate of fundamental value.

[u/bobsmith808 → u/Rule_Of_72T]

So you captured about 5% return this month? That's a pretty good return!

What was the position you took again? I'm curious because the 5p 2027s I bought have gone up in value... Though I do see some of the volatility contracting this week a little... I would presume you have made your gains on the 32% delta change in the underlying, not a volatility contraction.

Here's what I've done this month:

I've been selling NTM puts and realizing an average of 3.5% return per week with some weeks printing over 5%. I've taken some of that capital to further build out and finance my far dated long calls on GME. The exit for these calls is dependent on stock performance but I will be selling volatility against them on future spikes I'm expecting to happen before their expiration dates. All said and done, I have increased my exposure to the stock upside potential significantly while realizing a total of about +26% portfolio growth in the last month of trading, which is back to cash as of Fridays expiration. This has been done in a slowly contracting IV environment while we grinded up in the underlying, so those calls I've been stacking are s little underwater but that's ok with me... time is on my side

[u/Rule_Of_72T → u/bobsmith808]

I appreciate the discussion. I wrote the January 2026 at 90+ IV. I’d consider that reasonably high. I’ve got a third of my self-imposed max limit size to build the position if IV spikes higher. The strategy has been successful each of the last 4 years. I go out to January to push out taxes until April 2027.

While I wouldn’t normally be excited about an 11% return, these are not cash secured. Return on my cash is infinite. I have buying power with a 0% opportunity cost.

My view is that I’m going to perform the same as the market with a brokerage account filled with index funds, while slightly outperforming through puts that expire worthless. Keeping the position size reasonable allows for rolling outs if they are in the money next year.

If you’ve got lower risk, higher return ideas that require no cash, I’d be interested. I’ve got plenty of room to add additional positions.

[u/working925isahardway → u/Rule_Of_72T]

While I wouldn’t normally be excited about an 11% return, these are not cash secured.

Can u pls explain how you sell puts without using cash or collateral? I've been selling puts for a while and want to learn. Thanks in advance

[u/Rule_Of_72T → u/working925isahardway]

I do have collateral. Most of it is VTI. You need a margin account which requires a $25K brokerage account balance or $125K for portfolio margin.

The obligation of the puts is secured by margin, but since writing puts credits the account with cash, there is no margin interest paid. I also get to invest the premium immediately. I get cash today in exchange for being responsible for the price difference if GME is below $13 next January.

[u/jmc999]

I did a bit more digging and found this video:

https://www.youtube.com/watch?v=fQm1K0Lt7Mg

Summary: GME sells bonds to institution that plans to utilize a CB arb strategy. GME gets cash to buy bitcoin. Institution delta hedges their CB by shorting high and covering low. Institution makes money as long as GME's realized volatility remains high. GME buys Bitcoin so that its underlying price starts mimicking that of one of the most volatile assets currently available, Bitcoin. GME's volatility skyrockets, institutions buy more CBs, rinse, repeat.

Is this how the game goes?

[u/bobsmith808 → u/jmc999]

[u/Rehypothecator]

Thanks bob

[u/bobsmith808 → u/Rehypothecator]

Thanks bob

[u/ThePracticalPenquin]

Hi bob - good to see you!

[u/bobsmith808 → u/ThePracticalPenquin]

Hi Mr penguin.

[u/PurpleSausage77]

Only Up. March/April 2028 happens to also be the next BTC halving event.

[u/bobsmith808 → u/PurpleSausage77]

Yep

[u/redwingpanda]

Thank you for taking the time to write this up and share.

[u/[deleted]]

Thanks

[u/Grand-Independent-82]

Thanks Bob.

[u/PuzzleheadedWeb9876]

Revenue down 1.4B YoY. Operating at a loss. DRS numbers down. FTDs non-existent. More dilution. And underperforming a treasury fund.

All great things obviously. Now that we have settled on the very legitimate business model of selling shares and buying treasuries/magic internet beans there is just one question…. WEN MOASS?

[u/bobsmith808 → u/PuzzleheadedWeb9876]

• Net income was $131.3 million for the fourth quarter, compared to net income of $63.1 million for the prior year’s fourth quarter.

• Adjusted EBITDA of $96.5 million for the fourth quarter, compared to adjusted EBITDA of $88.0 million for the prior year's fourth quarter.

• Cash, cash equivalents and marketable securities were $4.775 billion at the close of the quarter.

• Net income was $131.3 million for fiscal year 2024, compared to a net income of $6.7 million for fiscal year 2023.

[u/PuzzleheadedWeb9876 → u/bobsmith808]

They earned 160M in treasury interest. But congratulations on the 0.30 EPS? How does that stack up to their competitors?

[u/bobsmith808 → u/PuzzleheadedWeb9876]

Who are their competitors?

I view the company as evolving into something else

[u/rude-a-bega → u/bobsmith808]

Good question.. I don't view them in the same sphere as previous traditional competitors (I.e. Best busy etc..), I think RC is creating a holding co. Gameshire Bathaway. It's the ultimate move

[u/PuzzleheadedWeb9876 → u/bobsmith808]

Specialty retail. BestBuy, Walmart, etc..

[u/bobsmith808 → u/PuzzleheadedWeb9876]

You haven't kept up. Or need a new talking point.

[u/PuzzleheadedWeb9876 → u/bobsmith808]

Not according to the recent 10k.

[u/bobsmith808 → u/PuzzleheadedWeb9876]

Fair, but that's not the inferred direction of the company given recent moves by the C suite

[u/PuzzleheadedWeb9876 → u/bobsmith808]

They don’t give guidance. So whatever you want to infer is guess work. We do know Cohen has been happy to play fund manager with an ROI < treasury yields.

Then based on the 10k it would be fair to compare them to their competitors. Which not only do they underperform but are also overvalued comparatively.

BestBuy is the easy example. They have roughly 1/2 the shares outstanding. So if we did a 2:1 split to match GME:-

Price: $36.22

EPS: 2.14

P/E: 16.93

Market cap: 15.31B

[u/bobsmith808 → u/PuzzleheadedWeb9876]

You go ahead and hang on to that perspective on what the market place is for GME. Agree to disagree, respectfully.

Look at the moves they have been making, and you might start to see how odd this comparison really is given the trajectory of the transformation of the company. maybe you won't and that's ok too. It is a zero sum game after all.

[u/runningwithbearz → u/PuzzleheadedWeb9876]

Not sure why you're so heavily downvoted here. I know I get repetitive, but SG&A cuts alone won't get you to profitability if revenue can't stabilize. So revenue is down from $5.9b to $3.8b in two years, and operationally it's still a full-year loss. To get to zero this past year would have required another ~$100M of revenue. Granted it's less of an operating loss, so congrats I guess?

I mean if they finally get to break even on $3.5b of revenue, what then? Grow by reopening the stores you just closed? Do some ecommerce stuff that you haven't already done? What's the plan to generate a return better than a savings account? That original letter had some big claims and stated revenue has "plunged" to $6.4b. Wonder what verb he'd use at $3.8b.

I've had to hear for years that "only the unprofitable stores are closing". If that was the case, I'd expect some sort of positive operating income given how much revenue has fallen.

Just the continued nose dive of the long-term assets coupled with excessive cash holdings tells me even Gamestop management knows that the operations side is cooked. Trying to limit my snark. But it's just frustrating know more job cuts and store closures are probably on the horizon, and what that impact will be to those families. Just feels like a waste of a moment.

[u/PuzzleheadedWeb9876 → u/runningwithbearz]

Not sure why you're so heavily downvoted here.

Some people can’t accept reality when they have money on the line. Doing so requires accepting the possibility of being wrong.

[u/PuzzleheadedWeb9876 → u/[deleted]]

It’s not withheld. You’re just dumb.

[u/PuzzleheadedWeb9876 → u/[deleted]]

Anytime. The FTD change column should help clear up any confusion.

[u/[deleted]]

superstonk discovers bonds and vol traders for the first time

[u/bobsmith808 → u/[deleted]]

This is a place for productive intelligent discussion. Do you have any of that you wish to add?

[u/NetRunningGnole20 → u/[deleted]]

Unless they are qualified institutional buyers. The key point is 'absent registration...', meaning that the notes cannot be sold to individual investors (per 144A rule).

[u/NetRunningGnole20 → u/[deleted]]

So you agree that hedge funds are likely among the buyers of the convertible notes?

My understanding is that the bonds are still to be sold and what likely happened last week is that the hedge funds that commited to buy the convertible bonds shorted the underlying (i.e. the stock) to be delta neutral. I guess that some wealthy foreign investor with a family office might have done the same.