The GameStop Madness Isn’t David vs. Goliath — It’s Goliath vs. Goliath
Robinhood traders and Redditors are profiting off this. But they aren’t the only ones.
In early January, GameStop was trading around $18. By close on Wednesday, it had reached $364.15. An intense buzz has formed around the stock thanks to discussion on the Reddit forum WallStreetBets, further enhanced by dominant coverage in the media. At least one hedge fund that was shorting GameStop (betting the price would fall), Melvin Capital, got utterly crushed.
Some cheered the victory of Reddit and Robinhood over Wall Street. But it isn’t so simple.
What is shorting?
This mania started when the WallStreetBets subreddit began writing about some of the most shorted retail stocks. You can bet that the price of a stock will fall by taking on a short position. This requires you to borrow the stock from someone else first. Your broker then immediately sells the stock. You wait for the price to fall more, and then you buy the stock back at a lower price so you can return the shares to whoever you borrowed it from.
WallStreetBets publicly hatched a plan on the forum to buy and hold GameStop stock and GameStop call options in order to drive the price up so high that it…
