GameStop Stock price as of February 16, 2020
For four weeks spanning January and February of 2021 (and really two bonkers weeks from the 26th to the 4th), something interesting happened that hasn’t really ever happened in the Social Media Age (that’s what I’m calling the time post-2008). A retail business’s stock went from an average of about $15-20 per share to $347.51 per share in a matter of days. Stock prices soring and falling isn’t anything new. But what is new is the method in which this stock increased, and how it captured its own moment in the cultural zeitgeist.
But before we start, let’s get a few things out of the way. First: what is a stock. In the simplest of terms, a stock is literally a piece of paper (or digital paper in this instance) that says you own part of a company. It might be a very small part, and you might not have any rights (like voting rights or such), but it does mean one thing: that stock is a representation of the value of the company. Whether that value is a true representation of the company and value and money and such is up for theological debates. But what isn’t’ up for debate is that you can take that stock at any time and sell it to someone else and they will give you money for it.
Companies that are “publicly traded” mean that they have shares of stock that you can buy through different public listings (like NYSE, NASDAQ, etc). Why a company wants to be traded on a stock market exchange is a whole other issue. But what all these publicly traded companies have in common are two things:
They are required to list publicly available financial information about the company
The price of a share of their stock is determined by basic supply and demand. There are only so many shares of a company available to purchase. If someone wants to own the stock of a company, they will pay more money for it. If someone doesn’t want their stock, they are willing to receive less money for it.
Now, normally, you purchase a stock at a price, let’s say $10, and hold it, hoping that over time the value of that company and the stock increases. Let’s say the week after it’s worth $15. You then sell it, and boom, you’ve made a $5. This is how you make money with stocks!
But there are also other ways to make money with stocks. One of those ways is called a “short”. What is a short?
Well, let’s take two people, Jane and Tara.
Jane owns a stock of Very Good Company worth $100.
Jane thinks her stock of Very Good Company will increase in value one day, so she wants to keep it.
Tara, however, thinks Very Good Company is a very bad company, and that the stock price will soon go down.
Tara asks Jane if she can “borrow” her Very Good Company stock for a week. At the end of the week, she promises to give it back. She’ll even give Jane $5 for the hassle. Jane says, “Sure!” because she has no reason to sell the stock in the near future.
So Tara “borrows the stock from Jane, and immediately sells it for the $100 its worth.
A week goes by and Tara needs to return her “borrowed” stock back to Jane. Very Good Company’s stock is now worth $50. So Jane buys the stock worth $50, and gives it back to Jane.
Jane now has her stock back, and she made $5 for letting Tara borrow it.
Tara now has $45 dollars she didn’t have before ($100 sale - $50 purchase - $5 to Tara).
Everyone wins!
But what happens when the stock price increases instead of decreases, like Tara thought? That’s when Tara ends up losing money!
Now let’s pretend that Tara is a big ol’ hedge fund (the companies that trade stock all day every day and make billions of dollars). And let’s say a hedge fund decided to short A LOT of GameStop stock. It sounds like a good bet, right? GameStop, the retail company that sells used and new games in a world where everyone buys online and downloads their games. That company will probably lose value and those “short” bets will look good.
Well, let’s remember one thing: the value of a stock is determined by supply and demand. The more people “buying” a stock, the higher its price. The more people “selling a stock” the lower the price. “Shorting” a stock doesn’t affect the stock price at all, because it’s “borrowing”. It’s taking a bet that the stock price will go down.
And that’s where we found ourselves in January 2021. A big hedge fund (and other hedge funds) had “borrowed” a lot of GameStop stocks, betting that the price would go down and they would make LOTS of money. Remember, these are companies that play with millions and billions of dollars. That’s when regular people, often called “retail investors” because they are singular individuals and now firms, decided to ruin the hedge fund’s day.
A bunch of individual people decided to purchase GameStop stock. Because buying stock increases the price, a single purchase wouldn’t do much. But when you get hundreds, then thousands, then tens of thousands of people all buying stock - the price skyrocketed. This wasn’t an accident either. These people DECIDED to buy GameStop stock for a very specific reason: because the hedge funds had shorted it.
The hedge funds had borrowed the stock at a very low price, like let’s say $5, and sold it. But once the “retail investors” found out about this, they helped increase the stock’s price. To something like $345. That means for every stock the hedge fund borrowed and sold for $5, they would need to return it by purchasing it at the $345 price.
This is called a “Short-squeeze”. It’s how a $13 billion (with a B) hedge fund goes bankrupt.
Here’s a quick explanation by a redditor:
Now I’m going to turn to Twitter and Josh Gross (@endtwist) who explained the deeper background.
So back in September 2019 (!) some guy named DeepFuckingValue posted this on r/wallstreetbets.
It was just a post about his LEAPS (aka, Long-Term Equity Anticipation Securities — tl;dr long-dated calls) on GME. At the time, nobody understood his position at all. The top comment on that post? "Bid-ask spread on these are ridiculous, good luck getting rid of them" lol.
For the next year, every month about once a month, he posted his "YOLO GME" position. Every month for a year he got made fun of. I caught wind of this trade back in September 2020, a FULL YEAR after this guy was already holding. I also thought it was weird—the dying retailer?
So I dug into the public quarterly reports of GameStop. Every quarter, public companies are required to release what's called a "10-Q" which is a quarterly report of their financials. You can find them here.
And what did I find? GameStop was actually in a great financial position; they weren't going broke! In fact, they had a lot of cash-in-hand, enough to pay off all their debts. So why was it trading at like … $2-4/share?
Next, I looked at their short interest. "Shorting", for those who don’t know, is when you borrow a stock (from someone) and sell it on the market expecting the price to go down. You eventually buy back the stock at a lower price, return the borrowed shares, and pocket the diff.
So, the short interest was over 100% of total shares. In fact, it was 140%. Which makes no sense—how can you sell more shares than there are shares? Keep in mind, not all shares are actively traded. In fact, over 75% of $GME is locked up in passive funds and GME board & C-suite.
So really, short interest was like 300-500% of *float* (float is how many shares are actively traded, basically). Which is insane. Basically, the shorts (which are hedge funds like Melvin) were expecting $GME to go bankrupt and they'd never have to cover (return their shares).
u/DeepFuckingValue had figured this out long before anyone. Even Michael Burry (yes, The Big Short guy) who bought in AFTER u/DeepFuckingValue. And he bought in, with conviction in his trade, ignoring the haters.
A year later and people start to take notice on reddit. The price has started to inch up, from $4 to $8 to $12 over September and October. And more people on r/WallStreetBets started buying in. And then more people. And then more people.
Which, of course, makes the price go up. So the price keeps going up and more people keep taking notice and so on. Eventually, the shorts are supposed to cover. But how? They need to purchase more shares than there are in the company. Well, that means purchasing at any price.
So they start to cover, which means buying hundreds of thousands of shares, which pushes the price up more. And then last Friday, thanks to momentum and growing interest from retail traders, we had what is called a "gamma squeeze." Which isn’t the short squeeze!
So, quick aside to explain this: Market Makers (the big banks and funds, like GS, Citadel, etc) write options. When they do, they have to remain "market neutral" by law. So there are what's called "the greeks" on options: theta, gamma, etc. Look 'em up if you're curious. Anyway…
"Gamma" is a number between 0-1 that changes on a call as the price of a stock gets closer to the call price. Let’s say you buy a $300 call and the stock is $290. Gamma would be ~0.98. Meaning for every call purchased (which rep. 100 shares), MMs buy 98 shares to be neutral.
As gamma changes, they have to buy more or sell more shares. On Friday, the price was over every available call strike, which meant that MMs had to buy millions of shares—if a call is "in the money" (stock price > call price) they have to deliver the shares.
So on Friday and Monday, the price ran up very quickly as MMs hustled to cover the calls and settle them. Then the news took notice and everything went wild. More people piled in, larger firms are piling in on the buy side, Elon, Chamath… and the price exploded.
So that’s how we're where we are now. Supposedly, a number of shorts have covered. That being said, last I checked, the short interest was still ~138% so either: (a) the shorts haven’t covered or, (b) more people are shorting to replace the shorts that covered
When you short, you pay a borrow fee which can change from day to day. Right now that fee on $GME is between 20-80%. That’s like… credit card interest rates! To borrow a stock! So the longer you’re holding your short position, the more it costs.
Eventually, it either costs too much and you have to close your position for a loss, or you go bankrupt. Melvin almost went bankrupt (they got a $2.75B bailout from 2 other hedge funds). This is where we are now. Where does it go from here? I’m not sure!