At the end of January this year, a group of traders organized on Reddit was credited with one of the most surprising moves in the stock market. GameStop ($GME), the company in question, was one of the most heavily shorted companies in the United States.
Hedge funds have pledged hundreds of millions on the short side, hoping that the share price of the struggling company will go to zero. They did not count, however, on the power of organized retail traders that act in unison. Moreover, on the power of the 21st century financial markets and instruments.
What followed from the bull/bear battle was a massive short-squeeze. A combination of direct buying orders on the $GME common shares and call options triggered a short-squeeze that sent the $GME price to $347 from $17 in less than a month. Shorts lost money, and so did longs – but the saga is not over. $GME is surging again, making new victims.
GME Rallies Again, Triggering Massive Losses on the Short Side
$GME’s share price is up 2378% in a year. What’s more interesting is the entire rally happened in a month or so.
After both bulls and bears took losses, the price action in $GME appeared to normalize. Shares fell from the highs to $40, forcing retail traders that bought at the highs to take losses. On its way down, $GME attracted new selling interest. Orders pilled in, the pressure to the downside increased, but the company failed to surrender.
Its shares are up 99% in the last five days. Rumors in the market have it that the short-sellers reported losses of over $800 million Wednesday alone.
Options trading activity seems responsible for the exacerbated moves in $GME’s share price. Many traders are still trapped on call options with a strike price above $500. If the options expire and the $GME price does not reach that level or above, the options will expire worthless. Therefore, it may be that some traders doubled or tripled down on their initial investment.
According to Bloomberg, someone bought thousands of $GME call options on Wednesday with a strike price (hold it!) of $800. More interestingly, the expiration date is the end of the month – namely, today! It is just an example of how dramatic the price action in $GME is and how investors literally gamble in the hope of making a quick buck.