GameStop’s Reddit-fueled rally, explained

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.

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UPDATE: Tuesday, January 26th, 2021

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UPDATE: Wednesday, January 27th, 2021

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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 fund — D1 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.