The shares of a handful of firms like GameStop Corp. and BlackBerry Ltd. saw triple-digit gains in recent weeks, part of a frenzy fueled by individual investors. Here’s what you need to know.
Why is GameStop active?
GameStop’s stock rose more than seven times in 2021, compared to a 2.5% increase in the S&P 500. Video game retailer Grapevine, Texas, has become a favorite of online traders who invest in companies defended on the forum. Reddit WallStreetBets.
These investors target short sellers who are betting that the stock will fall due to what they consider the company’s business challenges. The basket of the 50 shares of Goldman Sachs Group Inc. with the largest short stake – Wall Street bets that the shares will fall – was up 25% in the year through Friday. The rising prices of heavily shorted stocks, like GameStop, have led to huge losses in hedge funds that bet against stocks, generating an emergency $ 2.75 billion deal to rescue one of these companies.
GameStop’s stock started to take off on January 11, after the company said it agreed to add three new directors to the board, and the upturn accelerated in the days that followed. In part, the gains reflect the popularity in recent months of dynamic trading, the practice of investing in companies whose stock prices are rising in the expectation that they will continue to rise, and an increase in options trading last year, which allows users placing big bets with a relatively small initial investment.
How do the options figure in this?
Options are contracts that allow investors to buy or sell a share at a specified price, on or until a specified maturity date. They have become increasingly popular with small investors in recent years, as brokers have made it cheaper and easier to trade. The volume of options trading reached a record high last year, with an average of just under 30 million contracts per day. This year, that number is over 40 million, according to Options Clearing Corp. – an increase of more than a third.