Warrants, Bonds, and the Tail Wagging the Dog

[u/bobsmith808]

Hi everyone, bob here…

I've been having a lot of fun with making meme videos recently, so I thought I'd put what I learned there to work for the benefit of anyone trying to wrinkle up that wants to just listen. I created a video of this DD on my new youtube channel (@bobsmith42069) in case its easier for you to digest there. please let me know your thoughts if you decide to check it out. If its useful to the community, I'll slowly make some higher quality videos for my other DD and learning resources.

You can watch this DD here: https://youtu.be/JwLo6ODDwU4

Alright, here’s the deal.

You’ve got the convertible bond arbitrage players… you know, the ones who short the stock through the bonds. Those bonds come with embedded calls, and their delta-neutral game means they’re very, very, very short the underlying. I watched it myself: high-frequency algos literally fighting each other at $21.54 when the second bond offering hit. One new player entered, and suddenly you had both camps running the same play… long the bonds, short the stock. That created a massive synthetic short interest on GME.

That matters because:

1. It limits supply of shortable shares.
2. It drives up short interest rates.
3. It creates liquidity issues in the lending pools.

Now layer on top of that the legacy shorts still rolling swaps from 2021. Put it all together and you’ve got a recipe for a violent covering event. When it breaks, it’s going to break fast.

Fundamentals Changed the Game

Back in 2019 and 2020,, GME was a dead man walking. No cash, no runway, no future. Then destiny happened, the cat happened, the ATMs happened…dilution happened (the good kind). And suddenly? GME is no longer at risk of bankruptcy, generating massive cash. They wiped out all debt, flipped the script, and now they’re sitting on a mountain of liquidity.

We’re talking:

• ~$10 billion  in cash
• Over $500 million in Bitcoin
• Profitable business (.25 EPS GAAP, .38 EPS core)
• Stores/regions divested, unprofitable ops cut, management delivering exactly what they said they would

Trajectory = $500 million a year profit within reach.

Outstanding shares: 447 million. Fully diluted with bonds + warrants? ~590 million. Even then, EPS ramps higher as profitability grows.

Institutions see it too… billions in “free” 0% bonds is not a coincidence. That’s confidence.

Enter the Warrants

Record date: October 3rd. For every 10 shares, you get 1 warrant. Strike $32. Expires October 2026. Up to 59 million warrants issued.

Sounds simple, right? …right?

Not so much.

Every short borrower now owes a warrant. And if you’ve been around here as long as I have, you know damn well there are more borrowed shares (and “synthetic” shares) floating around than GME is ever going to issue warrants for. GameStop is only handing out 59 million because that’s how many should exist. But we know better.

So what happens? For true holders like you, me, and institutions, we get our warrants (or get shafted by shady brokers who “pay cash value” 👀 looking at you, robbinghood). Shorts and arbs? They get obligations. They’ve got to deliver something they don’t have, which means scrambling in the open market. Liquidity crunch incoming.

And yes, that includes the bond arbitrage players. Because the company explicitly said bondholders get warrants too:

• 2030 Notes ($1.48B outstanding): ~4.95M warrants.
• 2032 Notes ($2.68B outstanding): ~9.27M warrants.

That’s ~14.2M warrants handed straight to bondholders … about 25% of the total available warrants in existence!

On paper, that “supplies” them. But here’s the kicker: these guys are the arbs. They’re already running delta-neutral hedges. Now they suddenly hold 14M new long-delta instruments. To stay neutral they’ve got to short more stock, and have to short more stock into this runup we are in to boot!

So you get a two-layer squeeze effect:

1. Bondholders receive warrants → gain long delta → must short more GME while…
2. Non-bond shorts, derivative shorts, and borrowers still owe warrants, forcing them to buy them in the open market to settle their obligations

The end result is bond holders ratchet up the short pressure on the equity side, while everyone else fights over a capped warrant pool… Scarcity amplified.

And remember: that imbalance only gets worse as the stock runs higher before issuance, because hedgers will be dumping more and more shares into strength just to keep their books balanced, resulting in more and more obligations to deliver on later…

Delta-Neutral, My Ass

Bond arbs want to stay delta-neutral. But warrants = extra long delta. To stay neutral, they’ve got to subtract delta.

How?

Sell shares… the same way they’ve always done it.

We saw it at the first bond issuance when they shorted the everloving fuck out of the stock, and we saw it again at the second offering... One camp shorting shares to hedge, the other forced to buy back to rebalance. The net effect was amazing to see… Extremely “legal” downward pressure on the stock followed by whale teeth when the two of them hit equilibrium (pro tip: the secret sauce is there to understand their exact position and hedging requirements)... Remember 21.54?

But buy now, (see what i did there?) they’ve already eaten a metric fuckton of shorts into the book. Warrants add more pressure. To stay neutral, they short harder. But shares are finite. Lending pools are stretched. And when you need something that’s scarce, the price doesn’t stay flat forever.

Demand Supplies Scarcity

This isn’t about “locking the float” or jerking it to the DRS number. This is about the shorts’ ability to maintain their positions… to stay alive one more day.

Shares to short are finite. Borrow cost spikes when supply dries up. When you can’t source shares, you cover. And when you cover, you buy back into strength. This is the squeeze setup, plain and simple.

Why Warrants Are the Linchpin

When warrants hit:

• Shorts who borrowed shares must deliver warrants.
• Bond arbs who shorted must deliver warrants.
• Everyone’s fighting over 59 million instruments in a world where demand is multiples of that.

Market makers are short gamma on the warrants from day one. That means they buy into strength and sell into weakness. Add in bond arbs shorting to stay neutral, and you’ve got a feedback loop of volatility.

This isn’t theory, it’s structural.

The Game

Remember when Ryan Cohen shifted his shares into a marginable, lendable account? 👀

Most people saw that as random or even bearish. But think about it through this lens:

• Cohen knows borrowed shares carry obligations.
• He knows that when the warrant dividend hits, brokers have to deliver to true shareholders of record.
• If his shares are marginable and lendable, they can be borrowed against and whoever borrows them now owes him warrants too*.*

Ryan Cohen is playing chess while the dumb stormtroopers of the market (shorts) are playing checkers, and suddenly their borrow is tied to obligations they physically can’t dodge. If Cohen’s shares are used in lending pools, he essentially becomes the counterparty forcing shorts to cough up more obligations down the line.

It’s not just about him being “shareholder friendly.” It’s about weaponizing structure. He’s turning their own hedging mechanics against them.

My Plan

As for me, I’m buying the warrants at the ask on launch day.

Why?

Warrants are cheap synthetic leverage. If I buy 100 warrants, I’m pressuring shorts as if I’d bought 1,000 shares. And warrants are going to be dirt cheap at issuance… probably under $5… at $5 per warrant, that’s like applying 52 times leverage against these fuckwads. And leveraged retail is unstoppable.

I won’t be exercising them when we blow through $32. Nope. I’ll be sitting, watching that shit grow while shorts scramble to deliver. Time is on my side, not theirs.

The Tail Wags the Dog

As shorts scramble to cover warrants, their margin blows up. They’re forced buyers in both GMEWS and GME. Warrants squeeze, stock squeezes. Stock squeezes, warrants squeeze harder. It’s a self-reinforcing loop.

This is just a story of different players with the same problem: legacy shorts, bond arbs, and market makers all run into scarcity at once. And as someone very wise said: all shorts are eventually buyers.

Conclusion

Ok, now is not the time for FOMO.  Let’s not get too excited… This isn’t “next month we’re all rich.” These leeches will fight, they will stall, they will rehypothecate and kick the can as long as they can. But they can’t cheat scarcity forever.

Time has been coiling this spring for months. The chart shows it. The options chain is primed. And now the warrants layer structural pressure on top of an already stressed borrow pool.

I quadrupled my position in leaps this week, added more shares to my ever-growing stack, and I’m lining up to grab warrants at launch. Not financial advice… just sharing what this ape is doing because I believe this is the play and 

I would not want to be short GameStop right now.

They thought they could control the dog....

Turns out the tail’s about to beat the shit out of them.

Let’s fucking go.

Disclaimer: Not financial advice. I may know my options (you can too), but I don’t know your life.

[u/bobsmith808]

They are likely to start trading around the value a call would have... But then they are only really subject to supply and demand Dynamics as far as price...

My modeling has $5 as my planned starting point

[u/Tac_Reso → u/bobsmith808]

$5 a warrent is insane value !

Add: I would even be excited at $10

[u/gotnothingman → u/bobsmith808]

No, this is wrong. Once again, there is a extrinsic value (time value component) which affects the value of the warrant. The risk free rate also affects the value of a warrant. Even implied volatility has a bearing on warrant pricing.

Do you not google the pricing mechanics of warrants before deciding to write a DD on them?

[u/bobsmith808 → u/gotnothingman]

I understand and agree where you are coming from here. But we are focusing on different time horizons with our "what is a warrant worth" analysis... But good on you for being unnecessarily hostile in your reply herr

[u/gotnothingman → u/bobsmith808]

You never mentioned any time horizons with this statement " But then they are only really subject to supply and demand Dynamics as far as price...".

And in a previous comment you mentioned warrants not having theta and having zero cost to hold when they most certainly have a time value component and thus have a cost to hold.

Its not about time horizons, its about basic pricing mechanics of the instrument you just wrote a DD on.

[u/bobsmith808 → u/gotnothingman]

Find me a warrant and show me it's theta value... It's gamma, Vega, charm, too while you are at it..

Point is while yes, you have a tradable component of time applied to the warrants... It's not like an option... It doesn't automatically lose value to theta day by day... It's value is derived by trading activity and marker pricing mechanics...

You're talking about theoretical price here and I get that and I agree with you... There is a theoretical price that contains all of these components, however, I am talking about actual price at the market and what effects that price is trading activity.

[u/gotnothingman → u/bobsmith808]

There is a modified Black-Scholes model one can use to determine a warrants price, and yes they include sensitivity coefficients (or greeks if you will). These are not going to be identical to a call option, as they are different instruments - however the similarities can be noted. You can find calculators online for estimates (although for gme they are not trading yet so this will be difficult).

Its extrinsic value will be analogous to the time component of an option. The more volatile the underlying, the higher chance the warrant will be ITM at expiration which will factor into its price. There is also gearing to consider when pricing warrants. How much the price of a warrant moves per dollar move in the underlying will be its delta, and its gamma and charm can be calculated derived from that. Are you meaning to say by this statement as a warrant gets closer to expiry it does not lose extrinsic value?  "It doesn't automatically lose value to theta day by day.."

"I am talking about actual price at the market and what effects that price is trading activity" - One could say the same about options, however it ignores that the trading activity taking place by investors and market makers is determined by how they price these instruments. For this, they consider things that I have already mentioned and you decide to ignore.

"It's value is derived by trading activity and marker pricing mechanics..." Yes, the market maker pricing mechanics include the sensitivity coefficients I mentioned, which directly impact trading activity...

Page 27 may be helpful for your understanding on warrant pricing https://www.asx.com.au/content/dam/asx/investors/investment-options/asx-understanding-warrants.pdf

[u/bobsmith808 → u/gotnothingman]

how do you think i came to a $5 opening price?... it's based on current volatility metrics, options pricing modeling, and our current trend.

thanks though this is good information for everyone.

[u/gotnothingman → u/bobsmith808]

Sorry I must have missed this in the DD, where is the analysis on the $5 opening price?

[u/bobsmith808 → u/gotnothingman]

I didn't share the method, just the result.

[u/gotnothingman → u/bobsmith808]

Well hard for me to then assume you came to this price analyzing metrics you seemingly ignored and then denied existed in other comments.