The Perils of Shorting: A Real Life Example

Tesla now the fifth largest company on US exchanges by market cap, just ahead of Facebook. With another 50% rise it will pass Google and with a 3x rise it will pass Apple to become the most highly valued company in the world.

For a company just scraping a few hundred million in profit I would regard that as limited upside. Time to buy some puts I think.
 
Interesting episode regarding Gamestop.

Apparently, the ageing high street based retailer was targeted by hedge funds as a dead cert for shorting.

But a group of day traders got wind of the plan, and started buying up the shares. This drove up the price significantly.

The traders knew that the shorting hedge fund would have to buy back the shares, even if the price kept increasing.

www.theguardian.com

White House ‘monitoring’ GameStop share surge as US hedge fund pulls out

Melvin Capital Management had bet on failure of store before small investors sent shares soaring
www.theguardian.com www.theguardian.com
 
Allpartied said:
Interesting episode regarding Gamestop.

Apparently, the ageing high street based retailer was targeted by hedge funds as a dead cert for shorting.

But a group of day traders got wind of the plan, and started buying up the shares. This drove up the price significantly.

The traders knew that the shorting hedge fund would have to buy back the shares, even if the price kept increasing.

www.theguardian.com

White House ‘monitoring’ GameStop share surge as US hedge fund pulls out

Melvin Capital Management had bet on failure of store before small investors sent shares soaring
www.theguardian.com www.theguardian.com
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This story is absolutely wild and is the best example one could ever have of the "perils of shorting". The legality of the transactions is obviously something that will be rigorously examined but it really gives the madness of crowds a whole new meaning. Interesting too to see Elon Musk egging on the Redditors given Tesla's storied history with shorters.
 
I don't know much about it, but the hedge fund managers are crying foul, and demands for regulations, and everybody is saying tough, you sow what you reap.

It's also a good example of the power of internet communications. The fact that Reddit, as a community forum, was able to (not organise but) facilitate this to happen is wild.
 
But what was it about Gamestop that was so precious to them many stocks get shorted, why did they want to protect this particular stoxk?
 
Thanks great explanation, it's a completely different situation to Tesla though, because Tesla had the big guys on both sides whereas gamestop had the little guys buying and the big guys shorting. Also gamestop is not big tech but the opposite and the reddit community are trying to protect, it so far very successfully, from big tech and big finance. They beat them at their own game.
 
Only by throwing their money away - either they have bought shares in Gamestop for a couple of hundred $ when they are worth $ 20, $ 30 at best or they bought options to buy them which they will never exercise thus forfeiting the cost of the options
 
joe sod said:
But what was it about Gamestop that was so precious to them many stocks get shorted, why did they want to protect this particular stoxk?
Click to expand...

Just wrote a blog post about it, so I'll just stick it here

www.bluewaterfp.ie

Investors are gaming the market - Bluewater Financial Planning

There is a war going on between retail investors and Wall Street at the moment and it involves an unlikely company, Gamestop. The computer game retailer has been struggling for years as it tried to compete with online sales and the move to digital downloads for the Playstation and Xbox. Last...
www.bluewaterfp.ie www.bluewaterfp.ie

jpd said:
Also, the fact that the "small players" were willing to take a loss
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That's the crazy thing. It's like trump's supporters, they have been stirred up into a frenzy. A lot of these investors put in small enough money and they are willing to lose it all just to stick it to Wall Street. The thing is, the profit they made can make a huge difference to their lives. Melvin Cap lost over $3 billion on this trade. Their investors put another $2.75 billion into their fund, they'll be alright. No one will do that for the retail investor.

The market is efficient in the long term and GameStop's share price will go back to $3 or close to it. Those left holding shares will lose all of their investment.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
joe sod said:
Thanks great explanation, it's a completely different situation to Tesla though, because Tesla had the big guys on both sides whereas gamestop had the little guys buying and the big guys shorting. Also gamestop is not big tech but the opposite and the reddit community are trying to protect, it so far very successfully, from big tech and big finance. They beat them at their own game.
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Tesla is future looking. GameStop is the past. There are two versions of the PS5, one of them is for downloads only and has no disk drive. How can Gamestop survive in a world that doesn't use discs for their games?
 
Reading a lot about it on Reddit. A lot of the stories are not about the money, it's personal as they want to stick it to Wall street. They lived through the effects of the crash of '08, where their parents lost their jobs, savings and sometimes houses. Stories of living on rice and beans for a year, and sleeping on their relatives floors. I don't think this is hyperbole. Stories of working minimum wage for years, waiting on tables etc. after college as the downturn took hold.
Meanwhile they saw the wealthy/fund managers get off scott free.
I applaud them, it looks like they might get some of that lost money back.

Just edited to add, good clear article Stephen, and good advice for anybody to not get caught up in the frenzy. For the guys and girls over in Wallstreetbets, it looks like it ain't about the money. In fact, some of them said they're willing to lose it.
 
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Not really. They stuck it to a few of the Wall Street big boys, but in the meantime a lot of others will have profited from the Gamestop share rise and will no doubt have taken their profits. Those left holding the parcel, sorry, shares at the end of the day will be left looking at a pile of mostly worthless paper or at least nothing worth the $300 they paid
 
SBarrett said:
Melvin Cap lost over $3 billion on this trade.
Click to expand...
This is an aspect that's hard to get my head around, and really shows the dangers of shorting. The entire market cap of GameStop was around $300m a year ago. Many of the shorts have lost multiples of the amount they could have made if Gamestop had collapsed (ok, they probably picked in with additional shorts after the price started to rise). The extent of the original short positions is also difficult to comprehend (short positions were about 1.2 times free float at one point I looked at), and shows how easily a short squeeze can be brought about in a small cap stock with massive short positions.
 
That was fun. Gamestop - business worth a few hundred million $

I am waiting to see the fun and games move on to Tesla :cool:
 
Buddyboy said:
Reading a lot about it on Reddit. A lot of the stories are not about the money, it's personal as they want to stick it to Wall street. They lived through the effects of the crash of '08, where their parents lost their jobs, savings and sometimes houses. Stories of living on rice and beans for a year, and sleeping on their relatives floors. I don't think this is hyperbole. Stories of working minimum wage for years, waiting on tables etc. after college as the downturn took hold.
Meanwhile they saw the wealthy/fund managers get off scott free.
I applaud them, it looks like they might get some of that lost money back.
Click to expand...

Read that too and it's nuts. Hedge funds come and go all the time but Wall street remains and always will. GameStop is down 60% today after robinhood and trading 121 stopped trading of the stock on their apps. Lots of people who had a significant amount of profit will have lost a lot of money today. Meanwhile, Wall Street keeps on making money. Losing all your money just so you can say you stuck it to the man is a phyrric victory.



Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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Friday is going to be very interesting, once the US markets open...

The reddit group have a recommend strategy, posted on their section of the community site. Suffice to say, they are expecting to come under serious pressure, from Hedge Funds and other interested parties, trying to force the price down.

Two further things of interest, are that :

* Some retail brokerages are understood to be restricting, or banning trades on Gamestop, so you've now got a lot of the small retail investors crying foul, logging formal complaints and proposing widespread boycotts against these brokerages.

* The US politicans are also starting to get involved, in their individual capacities, rather than formally taking a political party position, with what appears to be growing support for the WallStreetBets gang.

So, now we've got :

- a couple of million people, betting what may often be their modest and limited resources, despite many not having any knowledge or experience with stock market investing, not alone dealing in more sophisticated financial instruments, permitting them to take even larger positions through cfds etc.

- Hedge Funds, crying foul, and apparently lobbying brokers, regulators, and anyone else who will listen, to try and get retail investors banned, from these herd type tactics.

- a fading and struggling company, with a market cap. that has absolutely no logical correlation, to its underlying value

- a massive international audience watching in amazement, some probably now temped to get involved, with dreams of making quick cash, or to support the couple of million small investors already involved in this battle.

- Regulators and politicans facing a massive problem, because they are essentially seeing blatent market manipulation taking place, but will struggle to stop people making contact over the Internet, while they also risk a massive backlash, if they are seen to act in any manner, that appears to be "picking on the little guy".
 
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SBarrett said:
Wall street remains and always will. . . Losing all your money just so you can say you stuck it to the man is a phyrric victory.
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I believe that WSB'ers are finding that out according to these tweets from 'WSB Chairman':
"I got it wrong - it's not about occupying Wall Street - it's about leaving it."
"They can only control us because we use their currency."

It's nice to see that evolution of thought. On his second tweet, none of this would have been facilitated in the first place if they weren't giving out helicopter money! The revolution will not be televised centralised.
 
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