Share value was in single figures less than a year ago, now well over 200 mainly thanks to a motley collection of Reddit daytraders.

Serious redistribution of wealth, some life-changing amounts for small investors. Possibly life-changing for some hedge fund employees too. Fun lesson for them on the occasional risks of aggressive short-selling.

i saw this earlier. Isn’t the buying mainly out of spite?

In which case, it’s essentially a bubble, and anyone with a short position just needs to sit tight? In fact, looking at the curve, wouldn’t now be a good time to take a short position?

My lad bought a few at 50 something dollars, it’s been interesting to watch

anyone with a short position just needs to sit tight? In fact, looking at the curve, wouldn’t now be a good time to take a short position?

Depends how long your short has to run, I guess. God knows how high it can get, I’m sure someone will be eyeing it, but this ‘hold onto the shares’ has been running for a couple of months now on WSB. How many of them will have the fortitude to hold on past 3,4,5 hundred?

I discern that quite a bit of ‘eat the rich’ mentality is in play for some of them.

In which case, it’s essentially a bubble

Yes, the ‘true valuation’ is nearer 20 dollars. Just to show how separated the Wall St casino is from reality.

Has the Reddit community not got the same plot going on with BlackBerry too?

I don’t tend to delve around in the far reaches of Wall St Bets, this one has gone a bit mainstreamy though. I’d imagine people are nosing around for new candidates. Short-sellers are going to have to keep things a bit more subtle rather than declaring huge positions on single shares like Melvin did.

I heard a rumour that one of the main hedge funds to short GameStop will go bust today if the stock stays at the current price. Over-shorting

I don’t know what to tell you. Maybe I’ll tell you three stories.

Here is a fundamental story. There’s a company called GameStop Corp. It sells video games at the mall. It has over 5,000 stores. For various reasons people do not buy a ton of video games at the mall these days. Two of those reasons are: People do not love going to the mall during a deadly pandemic,[1] and people today increasingly buy video games by downloading them directly from online stores.[2] Being a mall retailer of video games is not obviously a great business to be in, and this has been reflected in GameStop’s earnings and stock price. In 2011, GameStop reported net income of $408 million on revenue of $9.5 billion; in the last 12 months, it had a net loss of $275 million on revenue of $5.2 billion. GameStop’s stock traded as high as $62.11 per share in 2007; it got as low as $3.50 in March 2020. It closed at $18.84 on Dec. 31, 2020, for an equity market capitalization of about $1.3 billion.

But some people think GameStop is primed for a turnaround. One of those people is Ryan Cohen, the former chief executive officer of Chewy Inc., the online pet-food retailer. If you can sell pet food online, you can sell video games online. GameStop does sell some video games online, and could probably do more of that and less with the stores in malls. Cohen’s investment vehicle owns about 12.9% of GameStop, which he started buying in August, when the stock was in the mid-single digits. In November he sent a stern letter to GameStop’s board of directors, reminding them of what a bad job they’ve done, asserting “that GameStop has the flexibility to evolve into a technology-driven sector leader,” and urging the board to try to do that. Two weeks ago, on Jan. 11, GameStop announced that Cohen and two of his friends from Chewy would be joining GameStop’s board. “Their substantial e-commerce and technology expertise will help us accelerate our transformation plans and fully capture the significant growth opportunities ahead for GameStop,” said GameStop.

So GameStop, which was bad, is becoming good. It was a money-losing mall retailer in a dying business during a pandemic, and traded like it, but now it will be a dynamic e-commerce leader in the rapidly growing gaming segment, and should trade like it. (Stock prices, of course, reflect the future, not the past.) Since the start of 2021, the stock is up 245%. It closed on Friday at $65.01 (a $4.5 billion market cap), up 51% in a single day. The rapid rise seems to have been fueled by small-time retail investors, who learned about GameStop online, principally on Reddit’s r/wallstreetbets forum, and who have been convinced of its enormous potential. Here is an actual stock analyst:

GameStop became a “cult stock because of Ryan Cohen’s success with Chewy” and retail investors “appear confident that he can implement omnichannel initiatives that will materially grow their earnings,” Wedbush analyst Michael Pachter said in an email.

Of course they might be wrong! There are lots of short sellers who think that GameStop is in fact a dying business, and that its prospects to improve are not great. Some of them, including Andrew Left of Citron Research, are quite vocal about it. They are betting that the current stock price is way too high. That’s how markets work; some people think a stock is good and buy it, some people think it’s bad and sell it, and the market balances supply and demand. Recently people have become much more enthusiastic about the future, and the stock has gone up.

Here is a technical story. It has two parts. First, a lot of people are short a lot of GameStop stock. (Notoriously, they are short more than GameStop’s entire float; Bloomberg tells me that short interest is 71.2 million shares, while GameStop has only 69.7 million shares outstanding.[3]) They are short for the fundamental reasons we talked about above: dying mall retailer with huge valuation, etc. When you short a stock, you borrow shares and sell them, promising to return them later. You have to pay a fee to borrow shares, you have to post collateral based on the value of the borrowed shares, and you (generally) have to return the shares you borrowed if the lender asks for them back. When the stock goes up a lot, short sellers start feeling “squeezed”: Their borrow costs go up, they have to post more collateral, and lenders might asking for their stock back. Some short sellers might have to capitulate, and they will close their positions by buying back stock. There is a feedback loop: The stock goes up, short sellers give up, they buy stock to surrender, and their buying pushes the stock up more.

Second, a lot of people (on Reddit) who like GameStop don’t buy stock; they buy call options. If you are a retail trader looking to gamble on a stock, you can buy call options to get leveraged exposure to the stock. For instance, last Tuesday (Jan. 19), you could have bought a $50-strike call option on 100 shares of GameStop stock expiring this coming Friday (Jan. 29). Bloomberg tells me this option would have cost you about $3.35 per share, or about $335 for a 100-share option contract; the stock closed that day at $39.36. If you sold the options on Friday (Jan. 22), when the stock closed at $65.01, they were worth $18.16 per share.[4] You put in $335 and got back $1,816; you made a 442% return in four days. If you had just bought 100 shares of stock instead, you would have had to put in $3,936 to get back $6,501, a 65% return. Of course if the stock had stayed flat instead of going up to $65.01, you’d have lost 0% by buying shares and 100% by buying the options. So options are great if you have a relatively small amount of money and want to take a lot of risk with it. If, for instance, you are a retail trader on WallStreetBets.

Meanwhile the market maker who sold you the options would have hedged its option exposure by buying about 40 shares of GameStop stock, for about $1,575. (This—the fraction of the underlying shares that the market maker buys to hedge the option—is called “delta.”[5]) Your $335 of option premium caused $1,575 of stock buying. More important, as the stock goes up, the market maker will adjust its hedge by buying more stock—by the end of the day on Friday, the market maker would have owned about 80 shares. (The change in delta as the stock price changes is called “gamma,” and people who like this sort of technical explanation love talking about “gamma.”[6]) You haven’t done anything else—you bought the options on Tuesday, and then stopped trading—but the market maker kept buying hundreds of dollars more stock as the stock went up to keep the option hedged.[7] Multiply that by the extreme popularity of GameStop options, and you get a lot of stock being bought as the price goes up—which, of course, pushes the price up more.

The technical story is just that these two factors—a short squeeze and a gamma trap, if you like—combined to push the stock up rapidly on Friday. Something started the ball rolling—the stock went up for some fundamental or emotional or whatever reason—and then the stock going up forced short sellers and options market makers to buy stock, which caused it to go up more, which caused them to buy more, etc.

Here is a YOLO story, a story of utter nihilism. You know this story. This story is perhaps best told with a series of rocket emojis, but let’s try words instead. The people on the WallStreetBets subreddit sometimes all get into a stock at once. This is fun, a nice social outing in an age of social distancing, a risky but potentially lucrative collective entertainment. Recently they decided to do GameStop. Because, I don’t know, they’re gamers, or because it’s a little comical to pump the stock of a chain of mall video-game stores during a pandemic, or because a lot of professional investors are short GameStop and they thought it’d be funny to mess with them. Or, especially, because their friends on Reddit were buying GameStop and they figured they’d join in the fun. Or all of those things in different combinations. Take one person who’s long for fundamental reasons, add 100 people who are long for personal-amusement reasons like “lol gaming” or “let’s mess with the shorts,” and then add thousands more who are long because they see everyone else long, and the stock moves:

“It was a meme stock that really blew up,” said WallStreetBets moderator Bawse1. “The massive short contributed more toward the meme stock.” GameStop seemed so utterly doomed that the current situation was actually sort of funny to the subreddit’s denizens. Banded together, WallStreetBets members bought in big enough to move the stock. …

“The traditional Wall Street view is that markets are driven by some tie to fundamental value,” said Hoffstein. “What we’re seeing is an influx of speculative retail traders who don’t have any philosophy about valuation.” He quotes a phrase from Bloomberg’s Tracy Alloway: “Flows before pros.” The market will be driven by a flow of capital rather than fundamentals. …

“I think the subreddit brings a new factor into stocks that wasn’t as prevalent as before,” says Bawse1. “It’s called hype.”

Meanwhile, calls of “BUY” alongside emoji rocket ships flooded the WallStreetBets Discord Friday, where over 25,000 onlookers watched chat fill with diamonds, rocket emojis, and obscenities. GameStop’s stock had just hit $60, a great leap from the $20 it was worth just last week. On Friday, 194 million shares were traded, over 12 times its average trading volume. In the Discord’s voice channel, where hundreds participated in the “gme-rocket,” yelling, humming, and intermittent announcements coalesced into something like a Gregorian chant.

Here is a seven-hour YouTube video from Friday in which a guy called “Roaring Kitty” dips a chicken tender in champagne to celebrate his GameStop wins. “This is the thing, overbought can stay overbought, remain overbought, even get more overbought,” he says, which is as good a summary of the situation as anything else.

Obviously there is some truth to all of these stories. We go in for a lot of cheerful nihilism here at Money Stuff, and of course I am inclined, when I read about Redditors pumping up a stock, to think “ah those Redditors, having their silly fun again.” I have written a lot recently about my “boredom markets hypothesis,” the notion that stocks these days are driven not by rational calculations about their expected future cash flows but by the fact that people are bored at home due to the pandemic and have nothing better to do but trade stocks with their buddies on Reddit. Why not trade GameStop, literally a stock about games? And if you look at WallStreetBets, there are of course a lot of rocket emojis and Lord of the Rings memes and screenshots of large numbers in people’s trading accounts.

But to be fair that’s not all there is; there is some discussion of the fundamentals of the company, too. Here for instance is a fundamental bull case for GameStop on Reddit, arguing that the company should be worth $50 billion, or about $700 per share. It’s a self-professed “venture capital perspective on GME,” which means that the thesis is literally “companies are worth 20 times revenues right?”[8] Still that is a sort of fundamental valuation. Here is another “DD”—“due diligence,” the WallStreetBets term for, like, an investment memo—discussing the business, albeit using more slurs and obscenities than is customary in equity research. I do not mention these to suggest that they’re right (or wrong), but just to point out that the GameStop … phenomenon … did not come from absolutely nowhere. There was at least a speck of fundamental dust for a cloud of meme-stock enthusiasm to form around.

On the other hand if your story of GameStop is just, or even mostly, “well the present value of its expected cash flows more than tripled this year, and was up 51% on Friday,” then I do think you are missing something essential. What happened on Friday?

The technical story is also surely true, at least in part, but I also think that it is a little overstated. For one thing, the actual institutional short sellers do not seem to be particularly squeezed. Their shorts are a small portion of their capital, there still seems to be plenty of borrow available, short interest does not really seem to be declining, etc. But, sure, someone probably threw in the towel when the stock went up, why not. There does seem to have been a huge amount of options trading on Friday, and there are suggestive signs that delta hedging of those options had a significant effect on the stock.[9]

Mostly though I think that this story is overstated because it doesn’t really explain anything. “The stock went up because a lot of people bought calls, and calls are magic”: Well, they’re a little magic—they’re a leveraged way to bet on stocks—but you need a lot of people buying a lot of calls for that to work. Why did so many people all of a sudden want to risk a lot of money on GameStop calls?

I keep coming back to the nihilism thesis. We talked recently about how the stock of a micro-cap company called Signal Advance Inc., which shot up 5,100% after Elon Musk tweeted something about an unrelated app named Signal. The error, as it were, was quickly corrected: Lots of news stories, and a tweet from the “real” Signal, clarified that Musk was not talking about Signal Advance. The stock kept going up. (It’s still trading at roughly 10 times its pre-tweet price, weeks later.) Perhaps the buyers were impenetrably ignorant, but I suggested another possibility: There is a mass of retail buyers who like to all buy the same stock, and Musk’s tweet gave them a Schelling point to coordinate around. They weren’t confused about what Musk meant; they didn’t care that much about what Musk meant. They just like to all have fun together, pumping some stocks. You don’t actually need a Schelling point to coordinate around. You can just go on Reddit and talk about what stock you’re all going to buy.

When I wrote about Signal, I got a few thoughtful emails from readers about Bitcoin. Bitcoin is a financial asset with no cash flows. It has value purely because people think it’s valuable. Bitcoin is worth $34,000 because other people will pay you $34,000 for it, and they’ll pay you $34,000 because other people will pay them $34,000, etc. There is no underlying claim; there is just a widespread acknowledgment that people think it’s valuable.

I do not say this to be negative about Bitcoin. This is fascinating! It is an amazing collective accomplishment to create a new thing, from scratch, that is valuable just because we collectively agree that it’s valuable. It is amazing to find a way to create that collective agreement from nowhere. Once you have it, you can actually do useful things with Bitcoin—as a store of value, a currency, whatever—that you couldn’t do before. Bitcoin created real financial value out of, essentially, the human imagination.

That’s cool but it’s also a terrifying proof of concept. If pure collective will can create a valuable financial asset, without any reference to cash flows or fundamentals, then all you need is a collective and some will. Just hop on Reddit and create value out of nothing. If it works for Bitcoin, why not … anything? Why not Dogecoin? Why not Signal Advance? Tesla Inc.? GameStop?

Anyway as of about 11:15 a.m. today GameStop’s stock had gotten as high as $159.18, fell back to $88.09, and had been halted four times for excessive volatility.

From Matt Levine, Bloomberg.

Hah yeah been watching it myself – DeepF***ingValue has some balls, $53k to £22m so far, madness – but at least it’s mostly the institutional investors shorting the stock that are losing their shirt this time around.

In which case, it’s essentially a bubble, and anyone with a short position just needs to sit tight?

I think the problem for them is quite a few are coming due and its that old “market can be irrational longer than you can be solvent” with the added spice of in this case its specifically asking you to step outside and discuss the matter.
One of hedgefunds reportedly has needed to do deals to get some more cash.

From Matt Levine, Bloomberg.

His newsletter is worth subscribing too even for someone casually interested. Can always skip the too indepth bits.

I bought a few at $77 but don’t really follow the whole Reddit thing so sold at a small profit. If it drops below $100 today I might buy back in.

“Watching this is hilarious, the big houses are screaming now for regulation, after they have in the past, repeatedly been busted for shitting the market for their own games. They are mad because the power curve is now in the hands of the smalls, and they can go **** of to the Hamptons. The SEC is probably laughing themselves silly, but they will be compelled to “investigate” whatever this move is.

Former SEC/Treasury regulator here. You’re 100% correct – I’m absolutely laughing myself silly.”

One of hedgefunds reportedly has needed to do deals to get some more cash.

Yeah, Melvin had 2.7bn dollars pumped in yesterday from a couple of other big funds. I don’t know what positions they still hold in Gamestop and others, but screwing over other investors by aggressively shorting stocks seems to be their MO. I think yesterday saw another organised effort to push the price down, perhaps creating the idea in investors’ minds that the squeeze was over, but the upwards pressure was relentless.

Elon Musk tweeting about it was probably unhelpful 😂

Fundamentally though, it is a bubble, and choosing when to get out will be key. What’s interesting is the amount of capital moving pretty much as one unit, and where that capital goes next. If it simply switches to the next heavily shorted stock, then potentially you’ll get something similar happening, which could be brutal for the short sellers.

Of course, the WSB mob can probably get away with it once in terms of the regulators, but if there appears to be an organised effort to transfer their effort to Blackberry or whoever en masse, must get a bit tricky to maintain that they just ‘like the stock’.

Fundamentally though, it is a bubble, and choosing when to get out will be key

Yeah Isaac Newton found that out when he went back into the South sea bubble

must get a bit tricky to maintain that they just ‘like the stock’.

Matt Levine wrote a fair amount about that yesterday with his normal “not legal advice” disclaimer and concluded it really isnt a scenario that was thought of when the laws were written so who knows what would happen. There doesnt seem to be any lying going on so its whether its market manipulation.
At which point if the regulators target that wont they need to look at “organised effort to push the price down,” as well?

At which point if the regulators target that wont they need to look at “organised effort to push the price down,” as well?

Does it ever work like that? Hedge Funds and the like have been getting away with blatant market manipulation techniques forever. Now they are at the receiving end of a small army of retail buyers, they are moaning like crazy. Trouble for WSB is that all the coordination is in broad daylight, and any obvious attempt to shift the attention of the current herd onto a fresh target will be latched onto.

As a spectator (who was considering how many N+1s yesterday could have funded 🙂 ) it’s fascinating to watch this kind of ‘swarm fund’ in action.

Trouble for WSB is that all the coordination is in broad daylight, and any obvious attempt to shift the attention of the current herd onto a fresh target will be latched onto.

Don’t threaten me with a good time.

I am pretty pissed off about the whole thing. I’ve been following WSB for a year or so but I decided to jump in on the hype on Friday. Made a decision to put in £4k ($2k BB, $2k GME shares) when GME was at 68.

But… Trading 212 still haven’t verified my account so I haven’t been able to buy anything real. I’m following it on the ‘Practice’ version of Trading 212 and my imaginary £4k is currently worth £5600. Profit = £1.6k = (n+1)/2. If that fake money goes ‘to the moon’ I might cry.

If that fake money goes ‘to the moon’ I might cry.

don’t look at the premarket

Yeah I know. NYSE has just opened and my £4k is now worth… $9480

N+2

I’ll keep you posted. 😭

But… Trading 212 still haven’t verified my account so I haven’t been able to buy anything real.

still, least you’ll be all set the next time such a once-in-a-lifetime opportunity presents itself 😂

Something weird is going on – both Reddit and Trading 212 are down.

Not sure I could take the pain of nervously watching the stock price while being unable to buy/sell because the 212 website was down. It’s gonna crash at some point and being powerless in that situation whilst watching your money disappear would be sooooo painful.

And that’s only with my £4k – there are people that have literally millions riding on this.

I’m not an economist or an investor, but it is interesting how this seems to lay bare the self-referentialeness of financial markets. Values are based on expectations of other actors’ future valuations, not much on “real-world” stuff.

still, least you’ll be all set the next time such a once-in-a-lifetime opportunity presents itself 😂

You are a funny guy. I like you.

great video explaining whats going on….

It is funny to watch the people who actually believe in the stock market as a non-insane non-dysfunctional non-monster thing reacting to this “But you can’t break the stock market this way! it’s totally messing with the way we normally break the stock market! That’s immoral!”

Something weird is going on – both Reddit and Trading 212 are down.

reddit added 1 million members to wsb since Friday

Elon Musk linked to it in a tweet after close yesterday

reddit added 1 million members to wsb since Friday

Yeah, and it’s also the top 4 posts on r/pop* which never happens (and 7 of the top 10).

* Still accessible on mobile for me.

I wonder if the website downtime is just a massive interest in ‘retail’ day traders watching the stock, or whether it’s more malignant than that. DDOS attacks on the biggest retail brokers (RobinHood in the US, Trading212 here) with a coordinated sell at physical stock exchanges to make it look like the price is dipping, perhaps?

Either there are a lot of very scared hedge fund managers, or the shorts aren’t as bad as thought, there’s no prospect of an irretrievable squeeze and they’re playing a game with the stock price. Who knows.

eToro is down to

$380 on T212
insanity

Bumped into it yesterday and it’s hilarious.

still, least you’ll be all set the next time such a once-in-a-lifetime opportunity presents itself 😂

Twice. Reminds me a bit of that weird Volkswagen thing a few years ago. 2008?

So I’m just playing for fun, by the time eToro was up I got $500 @ $322 and I’m already up $50, I’m just hoping for a couple of days of entertainment riding the rollercoaster and cashing out (assuming there’s anything left to cash out). I can’t imagine what it must be like if you’ve got millions in play.

Aaaaaaaand WSB is set to private and you have to be invited to gain access to that forum.

What a mad few days. Utterly fascinating to watch.

Deepfuckingvalue was sitting on just shy of $50,000,000 today.

Deepfuckingvalue was sitting on just shy of $50,000,000 today.

That’s reddit user? How much was his initial investment?

Fair play.

The whole system is a sham of a game. Guess you just need to know how to play it.

the stock market as a non-insane non-dysfunctional non-monster thing

this morning: me, joking

this afternoon: completely serious version of the exact same argument from an NYU business school professor with multiple published books who is one of the world economic forum's "global leaders of tomorrow" pic.twitter.com/UYIN5xt2Kx

— Max Kennerly (@MaxKennerly) January 27, 2021

That’s reddit user? How much was his initial investment?

$53k – the background to it is pretty crazy, he made a post a year ago predicting the stock price would blow up in January 21 (there was some sound logic behind it but still amazing it actually happened). Hedge funds were sure the company would go under so shorted it massively and left themselves really exposed.

So what’s the endgame? Once they get bored and sell their overpriced stock? Jump on the next crazy bandwagon?

As an outsider looking in, I’ll never get my head around how the human race managed to devise a system as unpredictable as the weather with such huge ramifications when it all goes wrong.

There has to be a better way? Or is the huge potential reward/ huge potential bust the only driver that works?

Just seems utterly insane.

So what’s the endgame? Once they get bored and sell their overpriced stock?

I think the idea is that they’ll force the hedge funds to buy at a peak that they dictate, leaving the shorts to swallow all the losses while everyone with stock now profits. Apparently a large tranche of the shorts expire at the end of the month so the accounts might need to be settled before then.

Some of these newly-wealthy semi-autist traders are gonna do something a bit reckless with the cash. Probably dump it into the next meme stock so I think we’ll see some fairly crazy fluctuations in whatever the WSB hivethink says. Maybe BB? It might be worth putting a load of money into BB now then cash out in a week after the GME dust has settled.

“ As an outsider looking in, I’ll never get my head around how the human race managed to devise a system as unpredictable as the weather with such huge ramifications when it all goes wrong.

There has to be a better way? Or is the huge potential reward/ huge potential bust the only driver that works?

Just seems utterly insane”

I think it’s important to remember what the stock market is / why it exists:
Give businesses efficient access to Capital. Unfortunately there are downsides to the system – the nasty hedge funds- although they would argue they are an important part of an efficient market.

I wonder who’ll play deepfuckingvalue in the upcoming film?

It’s been beautiful to watch so far, especially when the ‘professionals’ started complaining foul 😀