Gamestop (GME)

I don’t trade (vanguard all the way) but watching this has been insane. The price has doubled since market close yesterday…

this is definitely a cool time to be alive, to watch this happen.

Correct me if I’m wrong, is this what happened?

  • Gamestop had a poor outlook, institutional investors shorted it.
  • /r/wallstreetbets pumped it up, everyone bought raising the price.
  • the people that shorted it have to buy back at any price, so that’s driving the price even higher.

So what happens next? At some point the stock is going to return to where it should rationally be, who loses then? I’m going to guess that someone is going to dump a ton all at once, that starts a downward spiral, and that’s when people will lose. Or maybe not, I’m hardly an expert at this stuff.

I’m definitely not an expert and have only really gotten up to speed in the last 12 hours, but I think it’s slightly more complicated.

Gamestop did have a poor outlook, but it was primarily shorted by hedge funds. Not only was it shorted though, but 140% of the float (available shares to trade) were shorted. So a crazy high volume, really putting downward pressure on the share price.

Primarily /r/wallstreetbets says Gamestop isn’t that bad and things will unravel quickly if those shorts are forced to cover.

Now some mixture of shorts covering and more small retail investors buying driving the price up and huge volatility commences. Another hedge fund came in with additional cash for the big hedge fund shorting GME (Melvin), although I think they’re bankrupt on paper now regardless with GME at like $300.

What happens next… I’m not sure. CNBC says Melvin has closed their short but it’s billions of dollars worth, I don’t think the volume in GME is large enough to make that possible. In theory when they do close out the position it would drive the price way higher in a feedback loop. Alternatively people might get spooked and it could fall apart, I’ve no idea really.

How can they short more than the float? Don’t there have to be actual shares available to borrow to short? I remember CAS 9 readings talking about this being one of the reasons for people being unable to take advantage of price arbitrage on Palm when it was spun off/merged. It was literally mispriced, but there weren’t any shares available that you could short.

I think it’s a bit like the multiplicative nature of banks lending money. I loan you the shares and you sell them to person C, who then loans them to person D who in turn sells, etc.

I guess this explains Tesla’s stock price.

So, the new strategy should be:

  1. Be a huge investor.
  2. Tell people you are shorting a stock, when in fact you are not.
  3. Wait for Reddit Stans to push the price up.
  4. “Declare Bankruptcy!!”
  5. Short the stock now.
  6. Wait for price normalization.
  7. Close short position.