Bloomberg has a fantastic rundown:
- $GME was first pitched as an investment on r/WallStreetBets about 2 years ago, but the current craze built up over the past 12 months.
- Members on the subreddit r/WallStreetBets believed that GameStop, with 5k+ brick ‘n’ mortar locations, could turn around its fortunes by going digital.
- On Aug. 31, 2020, Ryan Cohen — the billionaire founder of pet company Chewy — bought up a big position in $GME (he now owns 10%+ of it) with plans to modernize the company.
- In the months since, a number of prominent hedge funds (Citron, Melvin Capital) revealed they were betting against (AKA short selling) $GME.
- Typically in short selling, you: 1) borrow a stock; 2) sell it to a buyer; and 3) if the price of the stock falls, you can buy it for a cheaper price you sold it at and return the stock to the person who lent it to you.
- One risk of short selling is called a “short squeeze.” Since you have to eventually return the stock you borrowed, problems can arise if there is a limited supply of the stock.
- In a “short squeeze,” the underlying stock will get bid up as short sellers try to get their hands on stock that they have to return.
- Options trading — the right, but not obligation, to buy a stock at a certain price — is also driving $GME up as institutions that sell these options are buying $GME stock to hedge their position.
- $GME stock is on an upward tear as these market mechanics play out and r/WallStreetBets traders coordinate their efforts.
Author: Trung T. Phan
Publication Date: 26 January 2021
Publication Site: The Hustle