The Epic Saga of GameStop (And Other Select Securities)
We Like the Stock!
By Kelvin Lin, news reporter
We Like the Stock!
By Kelvin Lin, news reporter
What would be the first thing you do if you became a multi-millionaire overnight? Think about it for a second. It’s a scenario we’ve all fantasized of. Alas, for most of us regular people, this pipe dream will stay just that, a pipe dream. However, for some very lucky investors in January, this is exactly what happened. In late January, 2021, short squeezes of GameStop (Ticker Symbol: GME) and multiple other securities such as AMC Entertainment Holdings Inc (AMC), Blackberry Ltd (BB), and Nokia (NOK) took place which resulted in these respective share prices soaring practically overnight.
Now you may be asking me, what is a short squeeze? To understand what a short squeeze is, we must know what short-selling is first. According to the Wikipedia definition, short selling is a “finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, hoping to buy them back later at a lower price. As the shares were borrowed, the short-seller must eventually return them to the lender, and therefore make a profit if they spend less buying back the shares than they earned when selling them.” To help you better understand this concept, I came up with a scenario.
Let’s say you’re an intelligent monkey investor and you’d like to make some money in the banana market. You read in the monkey newspaper article saying red bananas suck and are going out of style. You being the smart monkey that you are, realize you can make some money off of this. So you go to the big ape (The brokerage) and ask him for a bunch of red bananas (shares of a specific stock). The big ape lets you borrow a bunch of red bananas, and you go to the banana market and sell the bananas, at their current value. Now, you owe the big ape a bunch of red bananas. Now you sit there and hope that the value of red bananas in the banana market will depreciate so you can buy them back for cheaper. If the value does in fact depreciate, you can buy the red bananas back for cheaper, and return them back to the big ape for a profit. However, the opposite is also true. If for some reason, the value of red bananas ends up appreciating for some reason, say monkey Elon Musk posting a meme about red bananas on monkey Twitter, you will have to buy the bananas back at this higher price and return them back to the big ape for a loss.
Now that we understand what short selling is, I can now explain what a short squeeze is. A short squeeze occurs when share prices of a certain security jumps sharply for some reason, and those that shorted the stock initially, have to buy shares of a stock back in order to minimize their losses from their short positions. Funnily enough, by buying shares of this certain security, you end up driving the price even higher. If enough short sellers end up doing so, we have what is known as a short squeeze which can drive prices of a certain security astronomically. We can insert this concept into the aforementioned monkey scenario. Now let’s say monkey Elon Musk ends up posting the meme about red bananas on monkey Twitter, and the value of red bananas skyrockets. Now, you’re hemorrhaging value on your short position, and you, being the defeated monkey investor, decide to buy back the red bananas early and return them to the big ape in order to minimize the losses in case the value of red bananas continues to increase. Since you end up buying red bananas at this increased price, you give more value to each individual red banana, which causes other monkey short-sellers to cut their losses and buy red bananas which drives up the value of a red banana even higher. In this situation, those that believed in monkey Elon Musk and believed in the value of red bananas will be handsomely rewarded, with short-red banana sellers with their short positions taking the brunt of the damage.
This is exactly what occurred in January with GME, AMC, BB, and NOK. Redditor’s on the subreddit r/wallstreetbets realized that these four companies were being heavily shorted by hedge funds, specifically a hedge fund called Melvin Capital Management LP. In an effort to fight back and get revenge on hedge funds for their roles in the 2007, and 2008 financial crisis', these very, very brave retail traders (with probably a little too much risk tolerance for my liking) led by a man named Keith Gill with the Reddit username “DeepFreakingValue” (middle word has been altered in order to keep this article kid friendly) banded together and sent these stocks ‘to the moon’ (a term that this community use to describe the sharp increase of value for a specific stock) in one of the most prolific short squeezes of all time. Those that invested early and used risky investment methods, such as call options, were rewarded very handsomely with ‘tendies’ (a term used by this community to describe monetary gain) as the short squeezes began to attract attention and notoriety from the news media and from the general public. On the other side of the coin, however, the hedge fund Melvin Capital Management lost over 4 billion dollars in this epic trading frenzy from the 12.5 billion dollars they had at the beginning of the year! GME was at its peak worth over $500 per share compared to the measly $17.25 at the start of the month.
Now you may be asking me, what is a short squeeze? To understand what a short squeeze is, we must know what short-selling is first. According to the Wikipedia definition, short selling is a “finance practice in which an investor, known as the short-seller, borrows shares and immediately sells them, hoping to buy them back later at a lower price. As the shares were borrowed, the short-seller must eventually return them to the lender, and therefore make a profit if they spend less buying back the shares than they earned when selling them.” To help you better understand this concept, I came up with a scenario.
Let’s say you’re an intelligent monkey investor and you’d like to make some money in the banana market. You read in the monkey newspaper article saying red bananas suck and are going out of style. You being the smart monkey that you are, realize you can make some money off of this. So you go to the big ape (The brokerage) and ask him for a bunch of red bananas (shares of a specific stock). The big ape lets you borrow a bunch of red bananas, and you go to the banana market and sell the bananas, at their current value. Now, you owe the big ape a bunch of red bananas. Now you sit there and hope that the value of red bananas in the banana market will depreciate so you can buy them back for cheaper. If the value does in fact depreciate, you can buy the red bananas back for cheaper, and return them back to the big ape for a profit. However, the opposite is also true. If for some reason, the value of red bananas ends up appreciating for some reason, say monkey Elon Musk posting a meme about red bananas on monkey Twitter, you will have to buy the bananas back at this higher price and return them back to the big ape for a loss.
Now that we understand what short selling is, I can now explain what a short squeeze is. A short squeeze occurs when share prices of a certain security jumps sharply for some reason, and those that shorted the stock initially, have to buy shares of a stock back in order to minimize their losses from their short positions. Funnily enough, by buying shares of this certain security, you end up driving the price even higher. If enough short sellers end up doing so, we have what is known as a short squeeze which can drive prices of a certain security astronomically. We can insert this concept into the aforementioned monkey scenario. Now let’s say monkey Elon Musk ends up posting the meme about red bananas on monkey Twitter, and the value of red bananas skyrockets. Now, you’re hemorrhaging value on your short position, and you, being the defeated monkey investor, decide to buy back the red bananas early and return them to the big ape in order to minimize the losses in case the value of red bananas continues to increase. Since you end up buying red bananas at this increased price, you give more value to each individual red banana, which causes other monkey short-sellers to cut their losses and buy red bananas which drives up the value of a red banana even higher. In this situation, those that believed in monkey Elon Musk and believed in the value of red bananas will be handsomely rewarded, with short-red banana sellers with their short positions taking the brunt of the damage.
This is exactly what occurred in January with GME, AMC, BB, and NOK. Redditor’s on the subreddit r/wallstreetbets realized that these four companies were being heavily shorted by hedge funds, specifically a hedge fund called Melvin Capital Management LP. In an effort to fight back and get revenge on hedge funds for their roles in the 2007, and 2008 financial crisis', these very, very brave retail traders (with probably a little too much risk tolerance for my liking) led by a man named Keith Gill with the Reddit username “DeepFreakingValue” (middle word has been altered in order to keep this article kid friendly) banded together and sent these stocks ‘to the moon’ (a term that this community use to describe the sharp increase of value for a specific stock) in one of the most prolific short squeezes of all time. Those that invested early and used risky investment methods, such as call options, were rewarded very handsomely with ‘tendies’ (a term used by this community to describe monetary gain) as the short squeezes began to attract attention and notoriety from the news media and from the general public. On the other side of the coin, however, the hedge fund Melvin Capital Management lost over 4 billion dollars in this epic trading frenzy from the 12.5 billion dollars they had at the beginning of the year! GME was at its peak worth over $500 per share compared to the measly $17.25 at the start of the month.
On January, 28th, the popular brokerage app, Robinhood, and other brokerages halted the buying of shares of GME and other volatile securities at essentially its peak citing volatility concerns. This stopped the momentum of the rally and triggered massive selloffs of these stocks creating many bagholders in the process (those that bought a stock which has depreciated in value therefore leaving them ‘holding the bag’). This move obviously wasn’t popular from those that bought into the hype, and there was immense backlash from retail traders specifically towards Robinhood. Many accused Robinhood and their CEO Vlad Tenev, affectionately nicknamed Vlad the Stock Impaler, of catering towards the hedge funds. The Robinhood app was boycotted by many and review-bombed on all app stores following their decision to halt trading. They are now facing over 90 lawsuits from investors that resulted from that decision!
As a relatively amateurish investor myself, I watched the GME saga unfold with my very own eyes. I didn’t have the opportunity to participate in it but it was very interesting regardless, to watch history in the making. As more and more of my peers are introduced to the wild world of investing, I’d like to impart some words of wisdom. Don’t become a victim of FOMO (Fear of Missing Out). The situation with GME is something that happens once a decade. More often than not, these types of risky trades, if you’re not an early investor, will leave you bag-holding and giving someone else your hard earned tendies. If you’re hearing a specific stock in the news media, it’s probably too late to invest in that stock. Be safe and happy investing!
As a relatively amateurish investor myself, I watched the GME saga unfold with my very own eyes. I didn’t have the opportunity to participate in it but it was very interesting regardless, to watch history in the making. As more and more of my peers are introduced to the wild world of investing, I’d like to impart some words of wisdom. Don’t become a victim of FOMO (Fear of Missing Out). The situation with GME is something that happens once a decade. More often than not, these types of risky trades, if you’re not an early investor, will leave you bag-holding and giving someone else your hard earned tendies. If you’re hearing a specific stock in the news media, it’s probably too late to invest in that stock. Be safe and happy investing!
Works Cited
“GameStop Short Squeeze.” Wikipedia, Wikimedia Foundation, 16 Apr. 2021, en.wikipedia.org/wiki/GameStop_short_squeeze.
Leonhardt, Megan. “Robinhood Now Faces Roughly 90 Lawsuits after GameStop Trading Halt-Here's How Customers Might Actually Get Their Day in Court.” CNBC, CNBC, 17 Feb. 2021, www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-trading-halt.html.
Pippa Stevens, Leslie Picker. “Melvin Capital, Hedge Fund That Bet against GameStop, Lost More than 50% in January.” CNBC, CNBC, 1 Feb. 2021, www.cnbc.com/2021/01/31/melvin-capital-lost-more-than-50percent-after-betting-against-gamestop-wsj.html.
“Short Squeeze.” Wikipedia, Wikimedia Foundation, 19 Apr. 2021, en.wikipedia.org/wiki/Short_squeeze.
Leonhardt, Megan. “Robinhood Now Faces Roughly 90 Lawsuits after GameStop Trading Halt-Here's How Customers Might Actually Get Their Day in Court.” CNBC, CNBC, 17 Feb. 2021, www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-trading-halt.html.
Pippa Stevens, Leslie Picker. “Melvin Capital, Hedge Fund That Bet against GameStop, Lost More than 50% in January.” CNBC, CNBC, 1 Feb. 2021, www.cnbc.com/2021/01/31/melvin-capital-lost-more-than-50percent-after-betting-against-gamestop-wsj.html.
“Short Squeeze.” Wikipedia, Wikimedia Foundation, 19 Apr. 2021, en.wikipedia.org/wiki/Short_squeeze.