GameStop’s Reddit-fueled rally, explained

Video game retailer GameStop is up more than 20x since March lows (and +79% in just the past 2 trading days). What’s going on?


January 26, 2021

If you’re stonking, GameStop ($GME) has been an unmissable sight in recent months.

The video game retailer — which has seen its stock rise more than 20x since March lows — is currently an epic battleground stock, pitting Reddit day traders vs. legacy hedge funds.

Bloomberg has a fantastic rundown:

  1. $GME was first pitched as an investment on r/WallStreetBets about 2 years ago, but the current craze built up over the past 12 months.
  2. Members on the subreddit r/WallStreetBets believed that GameStop, with 5k+ brick ‘n’ mortar locations, could turn around its fortunes by going digital.
  3. On Aug. 31, 2020, Ryan Cohen — the billionaire founder of pet company Chewy — bought up a big position in $GME (he now owns 10%+ of it) with plans to modernize the company.
  4. In the months since, a number of prominent hedge funds (Citron, Melvin Capital) revealed they were betting against (AKA short selling) $GME.
  5. Typically in short selling, you: 1) borrow a stock; 2) sell it to a buyer; and 3) if the price of the stock falls, you can buy it for a cheaper price you sold it at and return the stock to the person who lent it to you.
  6. One risk of short selling is called a “short squeeze.” Since you have to eventually return the stock you borrowed, problems can arise if there is a limited supply of the stock.
  7. In a “short squeeze,” the underlying stock will get bid up as short sellers try to get their hands on stock that they have to return.
  8. Options trading — the right, but not obligation, to buy a stock at a certain price — is also driving $GME up as institutions that sell these options are buying $GME stock to hedge their position.
  9. $GME stock is on an upward tear as these market mechanics play out and r/WallStreetBets traders coordinate their efforts.

Over the past 2 trading days, $GME is up +79%. We have no idea how this will play out, but do know which subreddit will have updates.

***

UPDATE: Tuesday, January 26th, 2021

GameStop update because LOLZ

Yesterday, we talked about the GameStop ($GME), the video game store that has become a meme stock favorite on the subreddit r/WallStreetBets (WSB) and pitted retail investors vs. traditional hedge funds.

We (really) need to update you:

  1. One of the hedge funds (Melvin Capital) betting against $GME has lost so much money that 2 other hedge funds (Citadel, Point72) put up $2.8B to prop it up.
  2. Billionaire investor Chamath Palihapitiya (AKA the SPAC-man) got into the mix and backed $GME with a $100k options bet.
  3. On Tuesday, $GME skyrocketed, gaining +92%.
  4. For the WSB crowd, the cherry on top of the cake was a tweet from Elon Musk — noted hater of short sellers — in support of $GME and WSB: “Gamestonk!!
  5. $GME was up another +42% after hours following the tweet.
  6. In layman’s terms: $GME was trading under $4 in March 2020 and, as of 9pm EST on Tuesday, it was at $209.

Absolutely bonkers stonkers!

***

UPDATE: Wednesday, January 27th, 2021

How Reddit (and GameStop) changed finance

The GameStop saga continues, pitting retail traders of the Reddit forum r/WallStreetBets against traditional hedge funds (which, by one calculation, have lost a collective $25B short-selling $GME).

Memes aside, this drama has real structural implications for the finance industry. A few of them, per Bloomberg’s Cormac Mullen and Tracy Alloway:

  1. Trading flows are more important than fundamentals: In the Before Times, an investing edge was obtained through deep spreadsheet analysis. But with the rise of trading apps, the actual flow of money itself is a stronger determining factor in stock price.

  2. Options trading is an “affordable” way to move markets: Options are the right (but not the obligation) to purchase a stock at a certain price. What this means is that someone can bet on a stock for less than they would if they bought it outright.

    Despite a lower upfront cash outlay, options can still move the market because the financial institutions selling the options have to hedge their position by buying up the underlying stock.

  3. Short-sellers are the target: In Before Times, hedge funds used to write up long reports and make big splashy announcements for why they were shorting a stock. Now, if a hedge fund reveals a short position, it can become a target of the r/WallStreetBets crowd.

***

UPDATE: Friday, January 29th, 2021

Honestly, we tried not to write about GameStop ($GME) today, but this story is absolutely bonkers (seriously, when is the Michael Lewis book coming)?

If you want to catch up on how this saga has pitted Reddit day traders against fat-cat hedge funds, we’ve got you covered here.

On to the updates:

  • In addition to $GME, traders following the r/WallStreetBets subreddit have been piling into AMC ($AMC), Blackberry ($BB), and Nokia ($NOK).
  • At market open on Thursday, all of these stocks took a beating, and Robinhood — among the most popular trading apps for Redditors — restricted trading in $AMC and $GME (only allowing them to close out positions).
  • Robinhood’s tactics were so questionable lawmakers from both sides (AOC + Ted Cruz) dunked on the app…but don’t expect that unlikely pair to be working together on a bill anytime soon.
  • One hedge fundD1 Capital — is among the biggest losers betting against r/WallStreetBets and also just so happens to be one of Robinhood’s biggest investors.
  • Users have filed lawsuits against Robinhood for restricting trading in $GME (incredibly, more than half of Robinhood users have exposure to the stock).
  • In response, Robinhood says it restricted trading in response to SEC capital requirements. It also said it would allow limited trading of some restricted names — $GME and $AMC both jumped 40%+ after hours on the news.
  • Senator Elizabeth Warren lashed out at the SEC, saying ““We need an SEC that has clear rules about market manipulation and then has the backbone to get in and enforce those rules.”

This story is very far from over and we’ll have more on Monday.

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