![]() 19), you could have bought a $50-strike call option on 100 shares of GameStop stock expiring this coming Friday (Jan. To see why this is, consider the following from Matt Levine:Īst Tuesday (Jan. And it’s a great financial product for investors whose appetite for risk outstrips their cash on hand. A call option is a contract that entitles its owner to buy a given stock at a specified price within a specified time period. One way to amuse yourself - and potentially make money - would be to (1) gather with thousands of other similarly inclined people in an internet forum, (2) identify stocks that are being heavily shorted, and then (3) collectively buy up a bunch of shares in those stocks, so as to orchestrate a short squeeze.īetter yet: To get more bang for your investment buck, you could buy call options for your desired stock. Now, say you are a bored Reddit user with a fondness for gambling, resentment of Wall Street, and a small amount of spare capital. That can push the share price past some other hedge fund’s threshold for cutting bait, leading to still more market demand for the once-derided shares, which proceed to surge in value. This is especially true if you are a multibillion-dollar hedge fund that has amassed a large short position in a given stock: After all, the moment you buy back a large number of shares in a given company, you increase market demand for such shares, and thus put upward pressure on their price. If you run out of collateral, or your lender runs out of patience, you’ll need to buy back those shares at a loss.Īnd when you do so, you’ll make life a bit harder for all of the other traders who made the same bet that you did. If the shares you borrowed start climbing in value, then you’ll have to find more collateral to satiate your lender while waiting for the market to finally recognize the truth of your analysis. To borrow shares, you need to put up collateral, and be prepared to return such shares whenever your lender asks to have them back. This is called “shorting a stock.” And it can be a risky maneuver. One way to make money off that insight would be to borrow shares of GameStop, sell them for cash, wait for the price of such shares to inevitably fall, then buy them back at a lower rate and return the repurchased shares to your lender. Say you’re a hedge fund that has determined, through expert analysis, that the future of video-game retail is even bleaker than its present. ![]() You came for an explanation of how the stock market works again, because now that a stake in GameStop is worth more than one in Goldman Sachs - and a herd of Redditors have wrecked major hedge funds, while threatening to trigger a full-blown market correction in the process - you’re no longer sure you get this “late capitalism” thing. Wednesday afternoon, a share in the GameStop corporation attained its true, objective value of $321.14.Īll right. ![]() Fortunately, the collective wisdom of rational market participants ensured that they were eventually incorporated into GME’s stock price. ![]() Among them: How much nostalgia does the firm inspire in users of the Reddit forum r/wallstreetbets? And would a rally in GameStop shares be funny? Which is to say, has the firm crossed the “so bad it’s good” threshold, as inadvertent comedic masterpieces like The Room or Troll 2 had done before it?Īmerica’s top hedge funds failed to ask these questions. One must also consider a wide range of other factors. And although the firm had made a big fuss about how it was pivoting to ecommerce and would soon rise like a phoenix from the ashes (and/or shuttered strip mall), conventional wisdom on Wall Street held that its stock had nowhere to go but down.īut the value of a company can’t be reduced to its expected future earnings. Whereas in 2007, one had to pony up $62.11 for a piece of GME (its ticker name), that figure had fallen to $18.84 by New Year’s Eve 2020. Until recently, the price of GameStop shares reflected these realities. And it has never been less wise to make an unnecessary visit to a shopping mall. It has never been easier to download some new lark onto your gaming console from the comfort of home. This is a poor niche for a profit-seeking entity in 2021. GameStop is a publicly traded company, best known for selling video-game discs and cartridges in shopping malls.
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