Okay, let me try to explain what is going on with GameStop $GME.
- Hundreds of thousands of retail investors are buying the $GME 60C ($60 $GME call options) across the options calendar and Market Makers can’t hedge properly, because there are not enough $GME shares to buy. (Basically, there are were more short positions than shares available)
1a. What is a Market Maker? A market maker is an individual or brokerage firm that buys and sells securities for its own account, at prices it displays in an exchange’s trading system, with the primary goal of profiting on the bid-ask spread. The most common type of market maker is a brokerage house that provides purchase and sale solutions for investors in an effort to keep financial markets liquid.
- As stock prices increase, the shorts are forced to cover their shares borrowed, by the Market Makers (who they’ve borrowed them from). But because of the huge supply/demand imbalance, these shorts have to cover at prices that seem irrational, but are rational based on the supply/demand equilibrium of available shares. What’s going on, is probably an infinity squeeze, which is the result of heavy over-shorting of shares, which are now difficult or impossible to cover. (Basically, There are too few $GME shares available, and shorts will be forced to buy back $GME at any price). This triggers a mass panic for the exits by anyone who are short shares.
2a. What is a Short Squeeze? A short squeeze is when a stock’s price jumps sharply higher, forcing traders who had bet that its price would fall, to buy it in order to prevent an even greater losses. Them buying up the stock, adds to the upward pressure on the stock’s price. (Basically, a short squeeze accelerates a stock’s price rise as short-sellers bail out, to cut their losses. Short sellers are being squeezed out of their positions, usually at a loss.)
Sidenote. In financial history, the two widely cited cases of an infinite short squeeze are the Volkswagen infinite squeeze of 2008 and the Blue Apron one of 2020.
a. Prior to October 2008, Porsche controlled 30% of VWs shares. The government fund of Lower Saxony (home province of VW in Germany) owned an additional 20% of VW as a strategic stake. In addition, various index funds owned around 5% of VW (These index funds were required to hold VW in proportion to its 17% weight in the DAX, such that they would not be able to sell simply due to changes in the price of VW).
b. So, you can do the math, 55% of VW shares were already unavailable in the market. As a result, when Porsche increased its stake by an additional 44%, it meant that the true available float went down from 45% of outstanding shares to around just 1% of outstanding shares. Suddenly the seemingly “low” short interest of 12.8% turned in to a massive supply and demand imbalance. Millions of shares needed to be bought immediately even though there were simply no shares available to be sold.
PS- Sometimes stocks which appear to be the “best short ideas” can also be the ones which often end up being most likely to see the most violent short squeezes
PSS- Perhaps a $TSLA infinity squeeze is in place, but will be slower than the $GME squeeze IMO, and also with a more permanent price increase.