The Game Stop Fairy Tale And Its Lesson

GME – Resurrected 

By late August 2020, the stock doubled to trade near $6 a share. Despite doubling, the trend of the last few years’ was firmly intact. More importantly, for the short investors, the fundamental story hadn’t changed. It’s likely some thought the price gains were a gift and added to their shorts.

As the calendar progressed, the stock moved higher. GME closed September at $10, October at $12, November at $18, and for the year at $20. Hedge funds that liked shorting it in the single digits must have loved shorting it at $20.

Unbeknownst to the hedge funds, retail investors were accumulating the stock of GME and other companies with large amounts of short interest. Trading forums like Reddit promote such squeezable stocks. The new highly speculative investor base, fed by zero commission platforms like Robin Hood, and recent large gains, were emboldened. They made a lot of money taking significant risks in the extremely speculative environment and were willing to escalate. They smelled blood in the water.

These new investors likely have little idea of what GME’s balance sheet or income statement looks like. Nor do they care. They saw an opportunity to join forces and make a lot of money. They saw a way to stick it to Wall Street, and they did.

As the stock price recovered in the fourth quarter, short interest rose. In fact, there were more shares shorted at the end of December than shares outstanding.  Retail traders could sense the squeeze, while hedge funds thought they were adding shorts with massive potential.

 

Squeezing the “Best and the Brightest”

The rouge retail traders, including some large investors like Elon Musk, David Portnoy, and Chamath Palihapitiya, understood they could buy and push GME ever higher. Their logic was that the shorts would get squeezed and have to buy back their shares to limit losses. As this occurs, the short-sellers buying back shares help their cause.

Squeezing a stock is not new. Banks, brokers, and hedge funds have perpetrated squeezes since they first started trading under Wall Street’s buttonwood tree.

Adding Gamma To The Squeeze

In this case, the rogue traders have another weapon up their sleeve. Over the prior months, Gamma Squeezes have become a popular trading weapon. The following comes from our article What the Hunt Brothers can teach us about Gamma Squeezes:

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