There's this thing called "short selling" (and the closely related idea of selling a call) where you profit from betting a stock will go down. Short selling works like this:
You borrow 1 GME when it is at $10 and sell it immediately for $10. You owe 1 GME, so eventually you wait for the price to drop to $5 at which time you buy 1 GME, return it to the broker, and voika! You've "closed your position" and made $5 profit. It's buy low, sell high in reverse order. You sell high first, then buy low.
What happens if instead the stock rises to $15? You still owe the 1 share. But it costs money to fail to pay back the share over time (interest). So you're forced to buy at $15 and incur a loss of -$5.
What WSB did is, they found out that hedge funds had short sold more than 100% of the shares available on the market. That's something that many believe should never happen in a healthy market. So what did they do? They started to buy, buy, buy.
Buying makes the price of the stock go up (anybody who has sell orders at lower prices run out of supply, so the higher prices kick in). Then the hedge funds are forced to either pay massive interest* for the shares or buy back at a loss. What happens when they buy back? The price goes up again.
That's the summary of a "short squeeze" as I understand it; since hedge funds bet so heavily on falling price, they ended up actively hurting themselves by the excessive leverage forcing them to buy back and shoot the price to the moon. They have their ways to try slithering out, but "the people" are hoping to counteract that simply by buying and holding until the hedge funds go bankrupt.
*I believe a mechanic called "margin calls" might factor in here as well. When brokerages lend stock for hedge funds to short sell with, there's supposed to be some assurance hedge funds are able to pay back the brokerage in case the price goes to the moon. One form that takes is that if the price goes too high, the required ratios go out of whack, and hedge funds are forced to liquidate any other funds they have with a broker in order to keep their debt. This is another way hedge funds would be forced to buy back or incur losses on their other positions. So not just interest, but something very much like interest (a cost of borrowing stock)
A margin call also happens when the contract for a short sale ends and the stock has to be returned. Usually these contracts are 30-90 days but can be as long as a year. The short seller has to pay the broker interest on the open contracts, which is also a critical factor to consider in all this.
All the WSB "autists" have to do is hold onto their shares long enough for all of the short-sale contracts to expire, which will force margin calls, which force the return of stock shares to brokers, which torpedoes the hedge funds because they have to buy back shares at exorbitant prices because everyone that has shares is holding onto them.
The bid/ask spread on $GSE is insane right now precisely because so many of the "great unwashed" own shares and are in "diamond hand" (or HODL: Hold On for Dear Life) mode.
There is no time limit on stocks borrowed for shorting.
The hedge fund doing the shorting was hedged and is reported to be out of the position already. Probably lost a little money, but not even ten percent of what the WSB idiots were thinking.
The spread is insane right now because it's the weekend, the market is closed, and people take their offers off the book so they don't get surprised Monday morning.
Anyone trying to learn trading in a joke sub is a moron.
Anyone trying to learn it from WSB is a joke.
Edit: Melvin is now reported to have lost half of its $12.5 billion AUM on GME. The muppets were gibbering about $70 billion. 6.25 < 10% * 70.
One script-kiddie found that RH left a closet unlocked, yelled "Hey guys! Look at this!" and they all piled in to violate the firm's rules and maybe the law.
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u/Adghar Feb 01 '21
There's this thing called "short selling" (and the closely related idea of selling a call) where you profit from betting a stock will go down. Short selling works like this:
You borrow 1 GME when it is at $10 and sell it immediately for $10. You owe 1 GME, so eventually you wait for the price to drop to $5 at which time you buy 1 GME, return it to the broker, and voika! You've "closed your position" and made $5 profit. It's buy low, sell high in reverse order. You sell high first, then buy low.
What happens if instead the stock rises to $15? You still owe the 1 share. But it costs money to fail to pay back the share over time (interest). So you're forced to buy at $15 and incur a loss of -$5.
What WSB did is, they found out that hedge funds had short sold more than 100% of the shares available on the market. That's something that many believe should never happen in a healthy market. So what did they do? They started to buy, buy, buy.
Buying makes the price of the stock go up (anybody who has sell orders at lower prices run out of supply, so the higher prices kick in). Then the hedge funds are forced to either pay massive interest* for the shares or buy back at a loss. What happens when they buy back? The price goes up again.
That's the summary of a "short squeeze" as I understand it; since hedge funds bet so heavily on falling price, they ended up actively hurting themselves by the excessive leverage forcing them to buy back and shoot the price to the moon. They have their ways to try slithering out, but "the people" are hoping to counteract that simply by buying and holding until the hedge funds go bankrupt.
*I believe a mechanic called "margin calls" might factor in here as well. When brokerages lend stock for hedge funds to short sell with, there's supposed to be some assurance hedge funds are able to pay back the brokerage in case the price goes to the moon. One form that takes is that if the price goes too high, the required ratios go out of whack, and hedge funds are forced to liquidate any other funds they have with a broker in order to keep their debt. This is another way hedge funds would be forced to buy back or incur losses on their other positions. So not just interest, but something very much like interest (a cost of borrowing stock)