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- GameStop’s shares started the week on a high due to a shake-up of the board.
- That price action ended up exploding in a total battle between day-traders and online short sellers, condemning stock gains.
- These short sellers – including renowned Citron Research – have argued that prices will fall soon. But Reddit traders had other ideas when raising stock offerings to levels that caused trading to disrupt.
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It all started with a letter from Ryan Cohen, the founder of the online pet supply store Chewy and an activist investor at GameStop.
Cohen, who also serves as an administrative member of RC Ventures, wrote to GameStop on November 16 urging the company to pivot online sales if it wants to stay afloat. Almost two months later, Cohen fulfilled his wish. GameStop agreed with RC to add three new directors, including Cohen, to its board.
Investors widely viewed the January 11 unrest as a positive factor for GameStop. The stock rose almost 13% and continued to rise in the following session. It was exactly at that time that Reddit smelled it.
Members of the subreddit WallStreetBets rushed to the stock exchange on January 13, praising the move and asking each other to take short sellers out of their bearish positions. GameStop closed 57% more that day. When the markets closed on January 14, GameStop’s shares doubled from the previous two days.
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‘Wait, my tough boys, wait’
WallStreetBets has targeted stocks before. The community played an important role in the rally driven by Hertz’s bankruptcy in 2020 and increased names like Plug Power, AMD and Nio. Tesla is a perennial favorite on the forum, in part due to Elon Musk’s unconventional humor and online presence.
However, previous schemes to create Internet-driven businesses have typically died within days. Retailers would take action, undertake a sharp rise and quickly abandon stocks as soon as they felt the bullishness was collapsing.
GameStop was different. Shares floated around a new support level of $ 39 earlier in the week. At the same time, more and more posts on WallStreetBets urged traders to postpone the sale and maintain the high.
A user reportedly turned a $ 785,000 option position on GameStop into a profit of almost $ 4 million. Another wrote an original maritime slum documenting his successful effort to increase actions.
“The price exploded, the shorts fell. Wait, my tough boys, wait,” sang Reddit user Quigonshin.
Enter the short
The buying frenzy intensified further on January 19, when Citron Research’s renowned short seller Andrew Left revealed his bearish position on stocks. Left tweeted that he would broadcast live on Wednesday and give GameStop five reasons to drop to $ 20. The broadcast was delayed once due to President Joe Biden’s inauguration and again on Thursday due to what Left described as repeated attempts hacking Citron’s Twitter account.
In a video on Thursday, Left described GameStop as a “bankrupt mall-based retailer” and scoffed at online merchants who fueled its recent earnings.
“The number of people who are so passionate about elevating GameStop is not based on any foundation – it just shows the natural state of the market right now,” he added.
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If GameStop’s earnings the previous week sparked the fire, the subreddit’s newfound rivalry with the left was napalm. The main feed on WallStreetBets was full of posts scolding the Left, editing the video to praise retailers and asking subreddit members to prove their pessimistic thesis was wrong.
On Friday morning, WallStreetBets day-traders won. GameStop soared higher in a wave of unprecedented volatility and steady high. The rise was so rapid that at around 12:40 pm ET, the New York Stock Exchange stopped trading.
At the time of the freeze, stocks were 69% higher. As soon as trading resumed, shares rose further to a 78% intraday gain, before profit realization was established. At the end of the session, shares closed 50% higher, at $ 64.75.
And just 10 minutes after the market opened on Friday, it came out tweeted he would no longer talk about GameStop due to alleged harassment and hacking online. The investor said that, while defending his thesis, a “furious mob” of shareholders led him to close his comment and “walk away”.
Pain to come
The theory that the hike was purely a small squeeze clashes with Friday’s data. Nearly 72 million shares were shorted at the end of the week, or about 140% of GameStop’s shares available for trading, according to data from financial analysis firm S3 Partners. In the past seven days, the shares sold rose 883,000, as more investors lined up to profit if GameStop fell again.
However, Friday’s extraordinary increase only intensifies the pain already felt by GameStop bears. Short sellers have already absorbed more than $ 3.3 billion in mark-to-market losses from the stock, which includes $ 1.6 billion on Friday alone.
What started as a short-squeeze is now a “vice-control of mark-to-market losses that will force both old and new to reconsider their belief in this trade,” said Ihor Dusaniwsky, managing director of predictive analytics at S3 . Business Insider in an email.
“More than likely, short negotiations will be eliminated with no chance of reappearing,” he added.
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