Redditors Vs Melvin Capital

 Before going in depth read what is meant my a short squeeze?

A Short Squeeze:

A short squeeze is a rapid increase in the price of a stock owing primarily to technical factors in the market rather than underlying fundamentals. A short squeeze can occur when there is a lack of supply and an excess of demand for the stock due to short sellers covering (liquidating) their positions.

1. What is Gamestop/GME?

Gamestop is a retailer that sells video games. Not online, in physical form. Which has been a problem, because people are increasingly buying games online. Gamestop, listed as ticker GME in the US, has recently lost $275 million in the past 12 months, on revenues of $5 billion.

Gamestop was a loss making business, it has been gaining interest because Ryan Cohen, the founder of Chewy, Inc (a pet food retailer that’s incredibly successful) has bought nearly 13% of the company, wants it to go bigger online, and has recently been added to their board of directors.

This would be good, but a rise from $18 at the end of 2020, to $461 (on peak) on Jan 28 is a little too much. 

2. Enter /r/wallstreetbets.

People started to discuss this stock as a candidate for the next big trade – the “YOLO” (You Only Live Once) bets that can make or break people’s lives. One such user named deepf***ingvalue, had put in a legendary $50K bet on GME in options. (This was September 2019).

That bet is now worth $13 million. And he’s probably booked more than $2 million out already.

This is the kind of thing that can make entire lifestyles change. That user has regularly been posting screenshots of his account which shows the meteoric rise, and obviously the 2 million users that make up WallStreetBets want in on the action.

3.Enter Melvin Capital:

 A certain set of hedge funds are short $GME. One of them is Melvin Capital, run by Gabe Plotkin, who used to work with Steve Cohen at SAC Capital (a now infamous hedge fund). Melvin runs $12 billion and one of the bets it took was that the GME shares would drop in value. A typical short position need not make any attention, but Melvin had bought a large number of “put” options, which have to be disclosed. The value of these put options was $55 million – not a big percentage of the Melvin fund (less than 1%) but this formed a trigger for the move up as well.

WallStreetBets decided Melvin was going to be the fall guy, and they further piled on to the stock.

The bigger problem is “short interest”. In America, you can borrow shares and short them. That’s how you profit from a down move – you sell first (borrowing someone else’s shares) and then buy back from the market later. The “borrow” costs money but you’ll bet that you make more after the fall than the cost of borrowing.

(You can do this in India too, but it’s limited)

4.Enter Elon:

Elon is openly against shorts. He even joined the discord meeting of Wallstreetbets.

(Psstttt………Melvin Capital infamously shorted tesla once).

Elon then tweeted about this.

As all things tweeted by Elon gets a boost. This too got a humongous boost.

5.Mark to Market:

The problem with being short is: for every $1 rise in the share price, you have to pay that $1 as a “mark to market” if you have borrowed shares. This “mark to market” loss for each rise means that the short seller eventually starts to hurt a lot. And then, to close out his position, the short seller will have to buy in the market and return the shares. When you buy into a market that’s already going up, you’re going to push the price up further.

This above is Short Squeeze.

6.Bankrupt Melvin Capital:

As of now Melvin capital has filed bankruptcy. GME is gaining rapidly.

THE END.

-Pranavh Devidasan.

Update 1 : Shares are falling and Melvin capital had been saved by some other fund.