The Wall Street Bets Subreddit is Poison to the Intelligent Investor

Degradation of data points, mathematics, and statistical measurement

Source: JJ Jordon on Unsplash.

R/WallStreetBets has become a centralized location for knowledge about the stock market. This is especially true for the new wave of young traders learning about derivatives and volatility and short interest and really every little thing in between.

Any given day you check, there are swarms of posts, ranging from $300,000 options bets to stories of gargantuan gain. With over 1.3 million members, it has become a topic of discussion for major news networks as well. In the current pandemic, these retail traders were thought to be responsible for inflating Hertz and Chesapeake energy right before they officially declared bankruptcy.

When Chesapeake Energy was gearing up for bankruptcy on June 8th, 2020, the stock drove up to over $80 a share from $10.

Source: CHKAQ. Chart courtesy of stockcharts.com.

This pump was thought to be driven by a slew of retail traders that have no fundamental understanding of the entities within the market. Following the pump, Chesapeake fell right back down to its levels beforehand. Then, it fell even harder.

In fact, it’s become a game.

But it’s more than that. Places like r/wallstreetbets have become a centralized hotspot for inaccurate analysis and pseudo-mathematics.

A post that I had saved from a month ago was claiming that the market was due to fall apart once more. The original poster proceeded to refer to some numbers, some available contracts, and referred to the VIX calculation via the CBOE white paper.

It’s a wall of text that’s strung together with incoherent analysis and non-existent connection. It ends with the original poster predicting these things:

Dump every-god-damn-long except long volatility

Long VIX 7/7 & 7/21 calls @ 60 strike

Long TQQQ way OTM puts for every god damn expiration from 6/12 to 7/21.

If ya played the akimbo, close the put spreads, should be a 2–3x right now, ride the other positions for free.

For the love of god, if you don’t want to go short, at least move to cash. You can move back in after the 1st week of July, if market’s still intact. But fuck me who am I kidding you guys are greedy assholes, see you in a couple of weeks when you’ll be shitposting about “cLoSing thE mArkEtS” again.

This post has 7,100 upvotes on Reddit. Worse, it has hundreds and hundreds of comments. It definitely hit the subreddit’s airwaves in a big way.

Let’s go over each thing that was stated:

  • Dumping everything. If you dumped every god-damn thing in June, you would have lost money. In fact, anything you bought, from retail to airlines to technology did better in July than it did in June. Not by a small margin, but by a wide one. Tesla, for example, while anecdotal, appreciated from just under $1,000 a share to over $1,500. If you went long volatility, like with the VIX, you would have lost 100% of your premium.
  • This brings us to the second point made. Long the VIX with strike points at $60 for 7/21 and 7/7. If you have been checking the S&P 500 for the last few months following March, you’d notice that swings justifying a $60 call don’t feel justifiable in the slightest, except maybe as a small hedge to protect potential economic calamity. To suggest that your entire portfolio should be shifted to this is quite insane and erratic.
Source: VIX for the last three months. Chart courtesy of stockcharts.com.
  • If you want long TQQQ between 6/12 and now, you would have lost. There wasn’t a single week you could have made money. There isn’t anything else to say here.
TQQQ last three months. Chart courtesy of stockcharts.com.
  • I’ll end with a combination of the last two. If you moved to all cash, you would have lost out. In fact, if you were already at a gain and you followed this poster’s advice, you likely incurred short term capital gains. Then you would have lost out on the potential gains of the last month. This kind of drives the entire theme of the subreddit: It’s one erratic, mindless post after another based in nothing other than whatever new concept or due diligence someone claims they have discovered.

On the subreddit’s rules, one of them includes “No market manipulation” and another includes “No pump and dump or schemes and scams”. I find it incredibly hard to discover what exactly this post is if it isn’t one or all of these three things.

Even if it isn’t, these are people who watch the news on this page every day. Last month, there was news of a 20-year old trader on Robinhood who killed himself. He found that his portfolio was negative by nearly a million dollars, but it was only temporary. He had been trading an options strategy and didn’t realize that the options would eventually settle into his account and correct that balance.

Kids like this exist on the subreddit. All of their situations are probably eerily similar. Kids with access to things like margins and options trading, gambling on a few thousand dollars and leveraging all of their money for the small chance at a jackpot. When posts like the above reach the distribution capacity of that subreddit and meet the eyeballs of over a million members, people are bound to follow news that is neither accurate nor coherent.

The stock market can’t be predicted on a week to week or a month to month interval. When the greatest, like Warren Buffet, with infinite resources, can’t seem to do it, it feels strange to think that a random community with anonymous posters might be able to figure things out. In fact, the few traders that are able to predict things on a consistent level aren’t financiers at all but mathematicians, physicists, statisticians, engineers, and signal processing experts. They’re all at a small shop in New York called Renaissance Technologies.

At the end of the day, people get hurt and lose massive amounts of money. The name-calling on the subreddit is one thing, but the added pressure of placing all the chips on the line every single week does not exist in a vacuum. These are human beings, blindly following an open community where anyone can broadcast an opinion without being fact-checked or verified in any way. This is a community where more upvotes equate to intelligence or correctness.

Putting the joking aside, the main component that drives this community is the toxic dream of becoming an instant millionaire.

But it’s a dream. People who make it that far are as likely to win the lottery. They are the stories that are willing to be told on the subreddit. For every winning story, there are thousands of people who lost everything they had, who won’t reply or follow-up on a post about a massive bet they made.

This is not your ordinary vacuum. The untold story is one that is shared by many who have been around or have followed the subreddit closely: It’s one of misery, stress, and massive loss.

Written by

UC Berkeley, mathematics. Los Angeles. Long-time runner. Top writer on Quora, 100M+ total content views. New to Medium. Inquiries: Moumj@berkeley.edu

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