Discussion of GameStop, stock trading, and this week's market crash(?) / rise(?)
Summary: A group of redditors executed a short squeeze of GameStop stock, forcing an over-leveraged hedge fund into bankruptcy and causing NASDAQ to halt trading repeatedly.
Simplified Explanation: A hedge fund made a bet that GameStop stock was going down, and essentially borrowed a bunch of expensive shares, planning to give them back when they got cheap and pocket the difference (a "short"). A bunch of people on Reddit decided to call their bluff and bought up the stock (and derivatives thereof) in a "short squeeze". A short has infinite risk if you bet wrong, and now the hedge fund has to pay back more GameStop stock than they can buy, because the Redditors aren't selling (because the memes told them not to). The hedge fund lost, to the tune of over $13,000,000,000, and the exchanges don't know how to handle the way the stock is yo-yo-ing.
Now there's a bunch of new paper millionaires, a few bankrupt billionaires, and questions about who is going to be left holding the bag. /r/wallstreetbets (the subreddit in question) is populated by edgelords with the usual racist, ablest mix that you can get over there and they frequently lose their shirts when they bet their life savings on the wrong thing by borrowing money via highly leveraged options. But in this case they've been able to beat the market (for the moment) by being even more irrational than the market.
Over the last two weeks, GameStop stock has skyrocketed. The WallStreetBets subreddit is currently getting very rich (for how long, who can say), while short sellers and investment research firms like Citron Research (which is shorting GameStop stock), are calling them all idiots: “Everyone on Twitter never has a losing trade. Everyone on Reddit is a genius,” Andrew Left of Citron said in a much-anticipated video about why GameStop investors are wrong. He suggested the people buying GameStop stock are going up against hedge funds who know much more than them, and that GameStop investors are losers who are trying to hack his Twitter account, are ordering pizzas to his house, and signing him up for Tinder.
Despite the volatile environment, or maybe because of it, people are now chasing the sort of returns regularly enjoyed by those sitting on gluts of capital. Take the Redditors who guessed GameStop stock was being shorted by investors, bought the shares to push up the price, and forced short sellers to buy up the stock to cut their losses—pushing up the stock price even further. Some of these Redditors were able to realize as much of a 900 percent return like this. GameStop stock is up 20 percent today alone.
This is not necessarily a “good” thing—daytrading is a pretty risky enterprise and at times indistinguishable from gambling. But there is no safe, responsible, idealized form of the stock market that this behavior is somehow abrogating. The stock market is best understood as something like the Yeerk pool from Animorphs—a home away from home for parasites to rest on their laurels in between various plots and attacks. The fact that stocks are skyrocketing while millions are out of work and facing eviction, restrictions are still in place around the nation, and thousands of people are dying daily, illustrates that perfectly.
1/25, Bloomberg: How WallStreetBets Pushed GameStop Shares to the Moon
Short sellers have been called a lot of things. Bloodsuckers. Parasites. Other words not fit to print. Now in the vortex engulfing GameStop Corp., they have a new name: the establishment.
It’s a role cast for them with relish by their chat-room usurpers, the tens of thousands of average Joe day-traders whose fervor for a left-for-dead retailer has become a self-fulfilling prophecy in its 245% rally this year. GameStop has become a money geyser for the options-obsessed crowd that gathers in Reddit’s WallStreetBets forum. For those wagering on a decline, it’s been a catastrophe.
“My thesis is not contingent on a turnaround or business expansion, this is solely a deep value play,” wrote delaneydi. “Even if we assume double-digit top line sales declines and gross margin contraction, the companies valuation does not reflect the current earnings power, especially when considering the companies large cash horde.” (WSB posters are not distinguished by their spelling or punctuation.)
The view fell mostly on deaf ears as the shares continued to tank and enrich bears. GameStop fell 15% in April of that year, 12% in May, 28% in June and 27% in July. Yet two things happened around that time to lay the foundation for the events of this month.
One was Michael Burry –- of Big Short fame and the veritable spirit animal for internet stock gurus hoping to hit the big time –- saying he was long the shares through his fund Scion Asset Management.
Second was the surfacing of an idea, first in jest, that eventually evolved into the blueprint for the crowd-sourced short squeeze that has blown up in January. Could GameStop fall so far as to make a takeover possible -- by WallStreetBets itself?
Another online watershed occurred when user “Senior_Hedgehog” alerted the YOLOing masses to the “biggest short squeeze of your entire life.” It was April 13, 2020, and, according to the elder Hedgehog, 84% of the retailer’s shares were held short. The final all-caps sentence imploring GameStop owners to call their brokers and tell them to not lend them short opened a new theater to wage war against short-sellers.
1/26, Bloomberg Opinion: GameStop Is Just a Game. Also BlackRock, Melvin Capital and Leon Black.
Of course the chart of GameStop Corp.’s stock price from yesterday is nuts. It closed on Friday at $65.01, opened yesterday at $96.73, got as high as $159.18 and as low as $61.13, and closed at $76.79. Almost 178 million shares traded, worth almost $17 billion. GameStop’s 10-day realized volatility is 308%. I am typing these words before the market opens on Tuesday, but by the time I send them the stock will have been trading for hours, and I am sure that it will have touched $4 and $4,000 and every number in between. It seems meaningless to talk about the price of GameStop stock, as though a single number could represent such an elusive concept. GameStop stock has all the prices at once.
1/26, The Motley Fool: GameStop's Gargantuan Gamma Squeeze
Video game retailer GameStop (NYSE:GME) has been experiencing breathtaking volatility throughout the month, particularly yesterday when the stock was up as much as 145% before dipping into the red by 6% and finishing out the day up 18%. Trading on the stock was halted 9 times throughout the day due to volatility.
Much of the recent activity has been attributed to WallStreetBets, a growing community of retail traders on Reddit. The bullish thesis is that Chewy co-founder Ryan Cohen, who has accumulated a significant stake in GameStop as an activist investor and secured a seat on the board of directors, will be able to help engineer a turnaround and accelerate the company's digital transformation.
Much has also been written about a massive short squeeze, where short sellers scramble to buy shares to close out their positions. That pushes the price higher, which can cause other shorts to bail on their positions, creating a cycle of intense buying pressure. With short interest of around 140% (since shares can be loaned out multiple times), conditions were primed for a historic squeeze. But that isn't the only type of squeeze that's been driving unprecedented volatility.
In addition to trading activity for the underlying stock, there has also been a surge in options activity. For example, Bloomberg reports that there were a record 913,000 call options traded on Friday, well above the open interest (the total number of contracts that existed as of the previous day) of approximately 400,000. Here's how options volumes are contributing to the enormous moves.
Like Bitcoin, Tesla, and the SPAC IPO, the Reddit forum r/wallstreetbets grew exponentially in 2020. In the first weeks of 2021, it discovered just how strong it's become.
The subreddit's subscriber count ballooned by 133% to 1.8 million members last year. Growth accelerated further this month, and the forum's 2.2 million current members now drive one of the platform's most active pages.
Members have spent the past three weeks bidding up the video game retailer GameStop, and the results have been spectacular. Shares have skyrocketed more than 1,200% since Wall Street Bets first piled in January 11. Their overwhelming bullishness has fueled billions of dollars in losses for short-sellers. One bear has even stopped commenting on GameStop stock, citing harassment from some members.
I don't have a penny in this fight, but it is at the very least entertaining, in a viewing-a-forest-fire-from-a-distance kind of way.