If you were on Reddit at the end of January 2021, all the stories were about Wallstreetbets (WSB) and GME shares. Seems likes every other story was about GME and the hedge funds shorting too much and retail buyes punishing them. Rather than revinventingthe wheel, here’s a short explanation from r/Outoftheloop
Answer: there’s other threads here that go into the technicals but I’ll try and keep it succinct.
GME is GameStop’s stock ticker. They’ve been on a down slide for a while and had been circling the drain with potential bankruptcy. A number of big money management firms have seen this and are taking “short” positions on the stock, betting that the price will go down by a lot.
WSB is many things, perhaps their biggest tendency is to go for YOLO plays – unsustainably risky but makes them filthy rich if they work. With all the press of big money going short on GameStop, a number of them decided to take the opposite stake and be “long” on it (betting the stock price will rise)
Two things have happened that have made the WSB crew looking like geniuses for this play, neither of which they caused (but will take credit for) 1: Ryan Cohen (who formerly ran chewy.com, a very successful e-commerce business) has been tapped as the new CEO and his plans for GameStop seem to be pivoting away from the failing system they had been using, raising faith in the company to right itself.
2: Because of the nature of a short position (borrowing stock and sell them, that you buy back and return when they’re lower) and the volume of big money movers on these short positions means there are more stock borrowed than exist for sale. This supply/demand mismatch is called a “short squeeze” because the short position needs to buy shares to cover the ones they borrowed, but there doesn’t exist enough shares for everyone to buy back what they’re short – which means whoever does own those shares (WSB) can ask almost whatever price they want, hence the megathread, the gain porn, and the bears on suicide watch.
In short, they had a hunch and it paid off, but they didn’t cause it (despite what they’ll tell you.)
So basically a load of retail investors made money from buying GME shares at the expense of Hedge funds and other short sellers. I look forward to reading the book about this and the inevtiable movie about it.
I personally stayed away from it, which with hindsight was a mistake. I could be driving my Lambo now. The question I need to be asking is, if I could go back in time, what would I have done differently. Say for example, I could go back to January 1st and the market would play out exactly the same way as it did, what would I do? I’ve asked this to a few people both in Ireland and the UK and there seems to be a lack of knowledge on the best way to have taken advantage of it.
The simplest way would be to just buy shares directly from Revolut. They allow commission-free share dealing. The simplest for most people but if you knew the stock was going to explode, why not use some leverage?
The users on WSB were a mixture of stock buyers direct and call option buyers. The latter caused something called a gamma squeeze which made the stock rise even more. On the app Robin Hood which they all use, options seem to be easy to buy. Over in Ireland, it’s not as obvious as to where you’d go.
I found a guide on reddit which has been deleted but I managed to get a copy of it. Basically, you can do RobinHood-style options at Tastyworks.
This is guide to US options trading from the UK, because I’ve seen countless requests of people browsing in /r/ukinvesting, /r/options, /r/wallstreetbets etc. about this.
First thing’s first – no part of this post is to be taken as financial advice. It is a guide on how to start options trading from the UK. Options/CFD trading is a high-risk activity and most retail traders lose money.
1. CFDs vs. Options
So getting started, options and contracts for difference (CFDs) are both financial derivatives – they derive their values from an underlying security e.g. stock, indices, currency, commodities. Long story short, CFDs are more akin to selling naked options – if a position moves against you far enough, you will be forced out of your position either via a stop-loss or a margin call. With options, you can limit the losses using spreads, which means you don’t need to use margin and you also maintain your position even if it moves hard past your maximum loss (key is that if it comes back into profit, you’ll be back in play)
CFD trading is regulated as gambling is (and due to this is even treated as tax-free on profits), whereas Options Trading is highly regulated as financial instruments because they genuinely have a use beyond speculation – institutions regularly use options to insure their funds and hedge against major risks for example.
For this reasons above, there is basically no options market in the UK – the only broker at this time is Saxo, and they only do vanilla options on Forex. Everyone else only does CFDs and/or stock (T212, Freetrade, IG, Plus500 etc.). To engage in true options trading, the only choice is to open an international/US brokerage account.
The two that are accessible to UK investors are Interactive Brokers (IB) and TastyWorks. Both are reputable brokers and have strong insurances for cash & securities held with them.
- IB is quite expensive (£20+ pcm minimum), but is the full bells and whistles international trading platform – you may access European options as well as worldwide markets on stocks/currency/anything you want really. Recommended for high value traders/investors.
- TastyWorks is the opposite – free accounts, low fees (zero inactivity, free stock trades, low option trading fees), though they charge $45 for cash withdrawals. TastyWorks primarily offer trading on US options and stocks, so anything listed on the American stock exchanges are game, including international companies listed via ADRs (e.g. global UK companies, especially on FTSE100).
3. Opening an account
I will walk through some of the aspects of funding and operating a TastyWorks account from the UK, as this is my recommendation if you’re here looking for a cheap way to get started.
Opening a free account on TastyWorks is easy (form filling within 20-60 mins – you will need a photo of proof of ID and address). It typically takes 1 day for cash accounts and 2-3 days for margin accounts to be ready for funding. My referral link if you feel this guide deserves the effort is: https://start.tastyworks.com/#/login?referralCode=GD9EGGNZYZ. (mods, happy to remove this is this guide is deemed low effort)
The account types are:
- Cash. Recommended to start because you can always open a margin account easily later. Able to buy long calls/puts and sell covered options. No short stock allowed.
- Basic (margin). Able to sell naked puts, and trade defined-risk strategies i.e. anything with a known maximum loss before entering the trade. E.g. credit/debit spreads. Note that naked puts carry significant risk – this is equivalent to CFD trading on margin, and you can have your position forcibly closed at unfavourable market rates if you overleverage.
- The Works (margin): everything above, and able to sell naked calls. Note that naked calls carry HUGE risk – this is equivalent to CFD trading on margin, and you can have your position forcibly closed at unfavourable market rates if you overleverage. The difference in naked calls and naked puts: stock can only go to zero, limiting the (huge) loss on a naked put, whereas a naked call has theoretically unlimited loss since stocks can (theoretically) go to infinity.
4. Funding the Account
Since trading US options is done in USD, the account must be funded in USD. With TastyWorks, the only option for UK traders is to deposit “By Wire”, assuming you do not have a US bank account – full instructions for the “By Wire” method will show up when you are approved to fund your account.
TastyWorks does not accept third party transfers (accounts not in your name), so services such as Revolut and TransferWise (inc. borderless) do not work (not directly at least).
You can either do an international wire from a GBP account directly (expensive, especially for smaller amounts <£1000) or set up a USD currency account and transfer through that. If you have the time, I recommend the USD currency account.
The account of choice is the Barclays USD Foreign Currency account – you need a current account with them to be able to open the USD account. Once the USD account is open, you can transfer into it using Revolut/TransferWise (cheap) and then international (wire) transfer from Barclays account to TastyWorks (free!). Note that the Barclays USD account is still a UK bank account, so you’ll need to use a SWIFT transfer from Revolut/TransferWise to turn your GBP into USD.
To withdraw funds, do the opposite, noting that $45 with be charged by TastyWorks per withdrawal.
That’s it for the guide – happy trading, and if there are any questions, feel free to get in touch and I’ll edit the answers in here. I want this to be a resource because I’ve helped many people get started, and it would be good to have it all in one place!
You can open a Tasty Works account from Ireland and trade options as they do on WSB with Robin Hood. I’ve personally decided against this though. It’s good to leverage when you are winning but can be expensive if you don’t know what you are doing. Plus in Ireland, the taxes are huge.
I personally have opted to open up a spread betting account with IG. Spread betting is tax-free in Ireland and the UK, so there’s an instant saving there if you make money. Imagine making €100,000 and having to pay the government €32,000, a nice problem to have but if you made that via a spread bet, then it’s all tax-free.
With spread betting, you just bet whether a stock will be higher or lower than a price, and the more, right or wrong you get the more you win or lose. So GME was just under $20 a share back on January 1st. For this example, let’s say it was exactly $20. With spread betting, you could bet, say £10 for every 1c the stock moved. So IG, or whatever spread betting company, might set the spread at $1.98 to $2.02. If you thought it would drop, you sell at $1.98. If the stock dropped to $1.90, you would make £80, whereas if it went up to $2.10, you’d lose £120.
This is where it gets interesting. Your maximum upside if you sell, is, £2000, and that’s if GME went bust and the share price dropped to zero. Your maximum downside is theoretically unlimited as GME could go to the moon. With the benefit of hindsight, it did go high so I would have bought at $2.02. When the stock hit $350, if I would have bet £10 per 1c, I would have made £347,980. The downside would have been £10 * 202, so £2020. This is the type of asymmetric trade Keith Gill, AKA Roaring Kitty AKA DeepfuckingValue was talking about before it all took off.
I’ll talk more about spread betting in another post maybe. I’ve got a couple of long positions open on Wetherspoons and Barratts Developments. The cost of the bet is spread (difference between the buy and sell size) times the stake. So in the example above, it would have cost £40 to set up.
If you are in the UK you can buy stocks via an efficient tax wrapper such as an ISA or a SIPP. I actually moved my SIPP dealing account over from Bestinvest to EQi, so I can deal USA shares too.
Will there be another GME? Probably not, seems like it was the perfect storm. There will be other stocks that rise exponentially. I missed out on Apple, AMD, Tesla, and many others which have had a stellar rise. I’m just making sure, that if another GME or similar opportunity arises I am prepared and can jump on.
Just my disclaimer, this is not financial advice. On the top of IGs website, it gives this warning.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
High volatility increases the risk of sudden, large or rapid losses.
It’s a lot safer just buying shares but the returns are lower and CGT is due. Options might be better for some, as the risk is just the cost of the option but CGT is payable too.
If you have any better ideas on how to capitalise on the next GME or spotted any errors, leave us a comment below.