A good description of what’s been happening with the stock. I was discussing this with some other options traders this morning.
[Update a while later]
More here.
[Late-night update]
Stop laughing about this stock manipulation.
It could be a harbinger of things to come.
[Friday-morning update]
Suck it, Wall Street.
[Bumped]
I sort of understand the Gamestop investors, but like so many cause celebs these days; they picked a really bad example to make their point. Gamestop, as it has been run for at least a decade, is a horrible and outdated business model. Only slightly better than Blockbuster.
They were ok when they allowed you to sell old games and others could then buy the used games at a lower price. This created a second market for video games and put them at a reasonable market-driven price. I think this created a more tiered market solution for games that was good for consumers and producers entering the market. But that model is antiquated compared to console memberships, that let you play loads of titles under a single monthly fee.
Now Gamestop is more like a high priced comic book store. Except instead of books, they sell games, yet like comic book stores, they are a good place to get all the other merch related to a favorite series. Those places do well, but there is usually one or two for a major city, not one per mall location.
So Gamestop is now flush with investment; is there anyone there to take that capital, transform the business model, and make it last? No. Well then this isn’t going to end well.
Gamestop doesn’t have any more money to spend. Its all numbers in the cloud. The stock price will revert to what it should be and the chain will be left with its business model and bad management. From the reviews I have read, it isn’t a nice place to work.
If I read this right, the investors shorting this stock got caught with more shares shorted than are in circulation. Since they have to purchase the shares to balance the books, someone is making that a costly mistake. The problem with options trading is, a small amount of money can make you a killing, if it goes the way you think. If it goes against you, a small amount of money can cost you everything. Unlimited liability was mentioned somewhere in this article or it’s links. That sums it up pretty well.
Your risk is unlimited only if you’re writing options, not buying them, and if they’re naked. They were probably selling bear-call spreads, which will also provide you with downside protection. But it’s still a good way to continually get into losing trades.
From the article:
What happened is that over the course of 20 days, Gamestop’s stock, GME went from $20 per share on January 11 to almost $350 per share today (January 27). About 80% of that increase happened over the past two days!
IMHO, it’s short sellers getting devoured, which isn’t common, but sure isn’t once in a lifetime (unless of course, we’re considering the lucky guy who happens to be holding 15,000 calls). Just consider DFV’s stake of 15k calls. That’s calls on 1.5 million shares of Gamestop (GME) or roughly a day’s worth of volume back in the day when DFV bought that stake. While it’s not big enough on its own, that’s already a significant contract that’s opposed by someone who probably doesn’t have GME stock to cover their position and hence, has a strongly leveraged position.
Now, I don’t know past that what happened, but here’s my take. Someone somewhat bigger than DFV picked up on the outstanding massive options purchases and assumed it was a signal of long term increase in the stock price rather than some crazy solo investor, and started buying, self-fulfilling the prediction at least in the short term.
Without the shorting, eventually the new buyer would have clued in and dropped out, leaving DFV perhaps with a modest profit, perhaps not. But I think what made this such a ridiculous bottle rocket was a big short seller then entered the market.
Short selling just means that you sell stock you don’t have. If it’s a modest amount, then it’s no big deal. You can cover it, if it goes up long term rather than the preferred direction of down, and just lose some money. And if you’re right, you’ll make a much higher yield (since the profit is over much smaller assets and you exit without holding any stock) than if you owned the stock, sold it at the higher price, and bought it at the lower price. Such is the power of leverage from selling something you don’t have.
What I think happened is that this big fish didn’t stay modest and kept short selling more and more, until it triggered mandatory margin calls. Then the big fish has to either sell other assets to cover the short position or buy GME stock at the new higher price to lower the short position. That’s who’s buying GME at such a ridiculous price now IMHO. When traders are forced to do crazy on a stock market, it can be amazingly crazy and costly.
My take is that once the crying is over and the short is covered, then the price will retreat way back, maybe even to lower than it was when DFV started his buying spree. There might be a few people looking for work since I can’t see this happening without someone losing hundreds of millions of dollars at the least.
If there’s anything historic to this episode, it may be that computer trading caused the excessive shorting and/or the short busting. Someone put a lot of money in and fished out those short sellers.
I ignored the difference between shorts where the seller borrows the stock and then sells it versus the naked short where the seller just sells stuff they don’t have. This most likely was a naked short.
You guys need to look at this a bit differently. The gamergate crowd got offended by a stock manipulator who shorted the stock and then tried to crash the price, and they took on Wall Street head-on. At this point in time its not clear but the gamers likely won. Short seller Melvin Capital had to borrow over 2 billion to survive.
https://web.archive.org/web/20210127070201/https://www.buzzfeednews.com/article/amberjamieson/gamestop-reddit-stock-shares
This.
One thing they could do to soften the fall; hostile takeover another company that is successful. With all that capital; I wonder if they could buy Epic, Steam, or GoG? If so, then they may have created a model to use small companies to devour big companies, not just hedge funds.
It would be the right play for Gamestop, but I think there’s no chance their stock stays that high long enough to complete a sale, and due diligence by the board of the target would be to stall…
Now if they could issue more shares, they could generate cash, but adding real shares is probably the easiest way to pop the bubble, so you’ld have to move very fast and time it just right (good luck with that).
I completely agree with your analysis, but it is still an interesting concept.
Stardock tried making a Steam competitor some years ago called Impulse. They sold it to GameStop, who after a while closed it down.
So their past record with something like that is not good.
My Take
There will be people who are going to lose their shirts but in the long term this isn’t going to be the biggest fallout from this fiasco. Nope. The organization with it’s head squarely on the chopping block is Reddit. Enabling illegal collusion in trading will be the means the SEC and DOJ could put it and all others like it out of business but good. Think asset seizure and bye bye servers. If they are hosted it’s even easier. Nope. The net net of this is that open blogs will become solely creatures of the dark web, hosted outside US jurisdiction, funded by dark money and Tor chains, encrypted and anonymized out the wazoo. Everyone else is moderated and cancelled on the spot. Thank you Gamestonk.
” Enabling illegal collusion in trading will be the means the S …”
You peasants can only talk to each other on approved forums where we in our infinite paranoia can monitor you. And only about what we want you to be able to talk about. Anything else is fomenting insurrection!
No telling what people might get up to if they’re allowed to “collude”.
Glenn Reynolds:
The more the techno-elite tightens its grip, the more Americans will slip through its fingers.
You are a traitor and a spy. You may proceed with the demonstration. Dantooine is far too remote for an effective demonstration, but we will deal with your Rebel friends soon enough.
“Never tell me the odds!” – Han Solo, momentum trader.
I know nothing about the stock market or hedge funds. I looked up what short selling was because I didn’t know.
Here’s my question: the Taibbi article states:
“…. at the spectacle of amateur gamblers doing to hotshot finance professionals what those market pros routinely do to everyone else”
Is that true? Do “market pros” really do this on a regular basis? Is the market manipulated on a daily basis the same way that was done with Gamestop?
Seems to me that’s the crux of the question. IF this was a one time manipulation then maybe the hedge fund people have a point.
if they do it regularly then they have no point.
They do it as a regular course. There is an infamous video of Jim Kramer admitting it. A good indicator of what to buy or sell is to do the opposite of what the institutions are recommending, because they are trying to get the retail investors to drive the stock up or down to the point at which they want to sell or buy.
+10. Yup. It’s self-dealing when YOU do it. It’s a free market when you can have a proxy do it for you.
https://youtu.be/OR98zE0poug
Taibbi wrote:
“Regarding improprieties, leaving aside that the Redditors were doing exactly what billion-dollar hedge funds do every day — colluding to move a stock for fun and profit — the notion that this should be the subject of a federal investigation is preposterous.”
Is this true?