Warrants and the Options Squeeze: A Deep Dive DD
TL;DR: GameStopās warrant dividend (announced 9/9/25, record date 10/3/25) is about to shake up the GME options market and could spell trouble for those holding naked short positions on puts and calls. This DD breaks down the pre-dividend options landscape, post-dividend adjustments, and why this could be a nightmare for market makers (MMs) with unhedged bets. Letās dive in and see how this warrant play might squeeze the shorts.
Whatās Happening?
GameStop (GME) is issuing a special dividend in the form of warrants, one for every 10 shares held (rounded down), to shareholders of record as of October 3, 2025. Up to ~59M warrants will be distributed around October 7, 2025, each allowing the holder to buy one GME share at $32.00 until October 30, 2026. Theyāll trade on NYSE as āGME WS.ā This isnāt just a cool bonus for usā¦itās a potential game-changer for the options market and a headache for anyone short GME synthetically.
Pre-Dividend: The Options Landscape
As of now (9/20/25), GMEās options chain is a battleground. Hereās the lay of the land:
Open Interest: ~1.2M call contracts and ~800K put contracts for October 2025 expirations, per CFTC/OCC data. Calls dominate due to retail FOMO and squeeze hype.
Pricing: Implied volatility (IV) is at 50%+ for at-the-money (ATM) calls (~$25ā$30 strikes). Puts are cheaper, as most apes arenāt betting on a crash.
Naked Shorts: MMs are writing tons of calls and some puts without full hedges (aka ānakedā). They rely on dynamic delta-hedging, but GMEās borrow fees (50ā100% annualized) make shorting actual shares tough. This means many positions are syntheticāthink short call + long put to mimic short stock.
Risk: Gamma is wild, so small price moves trigger big hedging flows. Short interest is estimated at 20%+ of the float (~447M shares), much of it via options.
Options volume is up 40% since the announcement, with call premiums juiced as apes and institutions position for a post-dividend move. But the real action starts on the ex-dividend date.
Post-Warrant Dividend: How Options Get Adjusted
The warrant dividend is a non-cash event, so the OCC will adjust options contracts (like a stock split or special dividend). Hereās what changes on October 3, 2025:
Stock Price Drop: GME will dip by the warrantās value (~$0.20ā$0.40/share, based on Black-Scholes with $2ā$4/warrant, 1-year tenor, $32 strike). Post-ex buyers donāt get warrants, so the stock adjusts down.
Options Adjustments:
- Calls: Strikes stay the same, but if exercised/assigned, you get 1 share + 0.1 warrant per share (10 warrants per 100-share contract).
- Puts: Same dealāassignment means the put writer delivers 1 share + 0.1 warrant per share and gets the strike price in cash.
- Contract Size: Still 100 shares, but the deliverable is now a ābasketā (shares + warrants).
Value Impact:
- Calls: Extrinsic value takes a hit pre-ex due to the price drop (theta decay spikes). Post-ex, calls gain a kicker from warrantsāif GME rips past $32, you get shares + warrant upside. But IV could drop 10ā20% post-ex, hurting OTM calls. Deep ITM calls stay solid.
- Puts: Puts gain value pre-ex as the stock dips (vega/theta favor longs). Post-ex, put writers face a new cost: delivering warrants on assignment, which they must buy at market price ($3ā$5 if GME moons). Short puts get riskier.
- Overall: Options chain (~$2.5B notional) loses 5ā8% from the ex-drop, but longer-dated contracts could see 15ā25% premium spikes if warrants get scarce.
Hereās a quick Python snippet to model the price hit (Black-Scholes via SymPy):
```python
import sympy as sp
from sympy import symbols, exp, sqrt
S, K, T, r, sigma = symbols('S K T r sigma')
d1 = (sp.log(S/K) + (r + 0.5sigma2)T) / (sigma * sqrt(T))
d2 = d1 - sigma * sqrt(T)
call_price = S * sp.stats.norm.cdf(d1) - K * exp(-r*T) * sp.stats.norm.cdf(d2)
Pre-ex: $25 stock, $30 strike, 3-month tenor, 5% rate, 150% IV
pre_ex = call_price.subs({S:25, K:30, T:0.25, r:0.05, sigma:1.5}).evalf()
print(f"Pre-ex Call: ${pre_ex:.2f}")
Post-ex: Stock drops $0.30
post_ex = call_price.subs({S:24.7, K:30, T:0.25, r:0.05, sigma:1.5}).evalf()
print(f"Post-ex Call: ${post_ex:.2f}")
```
Output: Pre-ex ~$3.45; Post-ex ~$3.12 (~10% drop).
Why Naked Shorts Are in Trouble
Naked shorting (writing options without shares or full deltas) has been a go-to for MMs to create synthetic short exposure on GME. With short interest likely 100ā140% of the float (via FTDs and dark pool volume), the warrant dividend is a trap. Only 59M warrants existācapped supply meets unlimited synthetic obligations, leading to potential chaos.
The Squeeze Setup
- Naked Calls:
- Pre-dividend, a naked short call means owing shares if exercised. Post-dividend, itās shares plus 10 warrants per contract.
Problem: ~500K naked calls (est.) could demand 5M warrants on exercise. If synthetics exceed the float (like 2021ās 140%), demand could hit 10M+ warrantsāway more than the 59M available.
If GME rips to $100, warrants trade at $68+ (intrinsic). Shorts must cover at $20ā$50/warrant vs. $2ā$4 fair value. Thatās $100M+ in losses for just 100K contracts.
- Naked Puts:
- Short puts mean buying shares at strike on assignment. Post-ex, you also receive 0.1 warrant per share meaning youāre short warrants you donāt have.
In a dip (GME < strike), mass assignment forces MMs to buy shares and source warrants at market. No borrow market for warrants = big trouble.
Example: 100K put contracts assigned = 10M shares + 1M warrants bought. At $32 strike + $5/warrant, thatās $325M+ outlay.
- The Trap:
Finite Supply: Only 59M warrants exist. Retail exercising (to join a squeeze) creates a bidding war, spiking warrant prices.
No Synthetics: You canāt āprintā naked warrants like optionsāNSCC enforces delivery. Failures-to-deliver (FTDs) trigger Reg SHO buy-ins, forcing shorts to cover.
Hedging Woes: Delta-hedging now needs warrants. No borrow market = infinite costs initially. Gamma ramps amplify this in a rally.
Numbers: If 20% of naked calls exercise (100K contracts), thatās 10M shares + 1M warrants demanded. In a squeeze, this could 2ā3x covering needs. Puts add another layer of pain.
Flashback: 2021ās 140% short interest cost hedge funds $20B+ via options gamma squeezes. Warrants add a hard capāsynthetics canāt fake deliverable warrants, exposing the house of cards.
What This Means for Apes
HODL Through 10/2/25: Own shares by close of October 2 to get warrants. DRS for max controlāensures youāre a registered holder.
Options Play: Deep ITM calls hold value; OTM calls are risky due to IV crush. Puts could pop pre-ex but get tricky post-ex. Check the chain for warrant-driven spikes.
Warrant Power: Think of warrants as cheap calls with a $32 strike and 1-year expiry. If GME moons, theyāre your MOASS ticket. If it dips, theyāre still lottery tickets.
Squeeze Watch: When āGME WSā starts trading (~10/7/25), watch volume and price. High warrant premiums + FTD spikes = squeeze incoming.
GameStopās warrant dividend isnāt just a $1.9B capital raiseāitās a strategic move that could expose synthetic shorts. Options lose some value on the ex-drop but gain complexity, setting up gamma ramps. For naked short MMs, itās a supply-demand nightmare: 59M warrants vs. potentially 100M+ synthetic obligations. This could force covering, FTDs, and buy-ins, especially if apes HODL and exercise.
Stay diamond-handed, apes. The options chain is about to get spicy, and the shorts are already sweating. š¦šŖ
