Many may wonder what happened recently with GameStop among other stocks which really went to the moon this month.
Basically what happened with GME’s stock price was a combination of a gamma squeeze (1) and short squeeze (2).
The gamma squeeze in short means that the market maker tries to hedge their positions but can’t (way oversimplified but I’m not gonna bore you with options).
The short squeeze in short in this context means that there are more shares shorted than actually exist, which has large implications for those who shorted. To close a short position you need to buy the share so you can give it back, this leads to buying volume which leads to increased prices. But if the supply of shares isn’t high enough and the demand to close short positions is so large this could lead to a cascading effect ending very bad for the institutions who shorted (most likely GameStop will offer shares at a market premium to these institutions so they can close their positions and GameStop can take advantage of the situation)
This excitement from wsb spilt over and people started scrambling for other shares with high short interest on the float ( Short interest is the number of shares that have been sold short, here represented as a percentage of float which means available shares), AMC, BBBY, LGND and BB are all over wsb now.
Most comments on wsb (gme is understated because it has its own thread)
Source: https://www.reddit.com/r/investing/comments/l3z5jq/i_created_an_algo_that_tracks_the_most_hyped/
This might end up bad for a lot of retail investors, especially if they don’t know what they’re doing so watch out for the cesspool which is wsb, tread carefully as this is a very complex event. I personally would stay away from it but it’s rather interesting nonetheless.
For those who want to read more:
- https://www.reddit.com/r/wallstreetbets/comments/l2t9bf/gme_i_think_this_is_a_gamma_squeeze_where_dealers/
- https://www.reddit.com/r/stocks/comments/l21gpz/infinite_short_squeeze_explained_blue_appron_case/
Update: note that GME was the only one with short interest as % of outstanding shares above 100% at the time, BB, BBBY etc didn’t have that characteristic.
Seems that short interest has gone down a lot since I wrote this, Ortex estimates the short interest to be at 27mil shares as of a 1/2/2021 estimate which leads to days to cover short of 0.76 which is a whole different situation from last week when I wrote the above. So the story might be a bit different now.
Disclaimer: I currently don’t own any GME shares anymore (sold out at a nice profit last Friday) I had 0.2 shares of GME for fun. It’s still very risky at this point and don’t invest any money that you absolutely can’t afford to lose.
