gme

This week (starting 25/01/2021) is an exciting event in the history of stocks, where rare events happening to the GME stock. Although, this might be a definite opportunity to make/lose money, I am in it for the knowledge of how the stock market works. As I am trying to figure out this event and learn more about options trading, I came across this comment which explains things so clearly that I decided to share it here, for my future reference on options knowledge and also to give my readers an insight.

On the question, what is going on with GME, this following comment explains the situation in ELI5 terms

Comment from discussion All right WTF is going on with GME.

Many people shorted. To hedge their shorts (since GME is sky-rocketing already), they will need to buy shares. But, since there are only limited shares available, this will drive the price more up, adding more pressure on other short sellers. This cycle repeats and is called the short squeeze.

Some keywords to understand

Shorting or short selling is when you bet your money on the stock declining. You sell shares at the current market price and you believe the share’s value decreases, you’ve sold high. Now, what if you don’t already own any shares? You can borrow shares (from the market), by making the market buy it from you in some future date. Where will you have it in the future? You buy it from the market’s future price (which you believe to be lower than current price) and hence have made money.

Many short sellers have borrowed GME shares, speculating it to crash and sold these borrowed shares to the market. Now, there are only limited shares available and due to heavy short selling, the (borrowed) shares are not actually available.

Companies which have already shorted, (predicted that the stock will go down) but since the opposite is happening (GME has sky rocketed to ATH since people have shorted), the short sellers will buy GME stock to reduce their future losses (or, reduce risk). This is called hedging.

The same user further explains with an example why the market makers (MM) would buy

Comment from discussion All right WTF is going on with GME.

What to do?

This is a rare event where normal people like us can coordinate and take money for MM. I do not advice to do anything. Do your own DD, but I have bought some position today at open and hoping the squeeze to happen. Note that short squeeze could take days to happen. And the next question is, when to sell? Very good question. Nobody knows. Depending on your apatite for loss, you can wait for it to truly rocket or take whatever gains without FOMO on future gains.

Edit 1 26/01/2021

Today we have seen another gamma squeeze where GME rose till $155 (over 100%) but at the end of the day, GME came down, closing at +20%. What drove the price down was believed to be a short ladder attack, where a short seller sells to another short seller and within a short time, the other short seller sells it back. What this does is make people think that other shareholders are selling at lower price, thus creating a havoc and making some of the investors sell at lower price.

GME - How shorts manipulated you, and how you can be better from r/wallstreetbets

Edit 27/01/2021

GME stock today

Yesterday we have seen yet another gamma squeeze but this time it did not drop back. It was amazing to see GME rise by so much after hours. Maybe it was due to Elon Musk’s tweet?

The Endgame strategy?

GME Endgame from r/wallstreetbets

Final Edit:

GME peaked at $450 as the result of the squeeze. Many brokers including the famous Robinhood in the US halted trading on GME. That means, no one was allowed to buy GME shares anymore. Only selling was allowed. As a result, the price fell from there. Many analysts later said that it GME wouldn’t be halted, it would indeed reach $1000.

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Disclaimer: This is not a financial advice. Do your own DD before investing.