Member-only story
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 would create a “short squeeze.” A short squeeze is when a price jumps so high that the short sellers are forced to buy back the stock to close out their position (usually due to their broker requiring them to put up more cash because they’re losing money so fast — this is a “margin call”).
All the attention and momentum from the press brought in more retail traders buying GameStop, and Wall Street itself hopped in for the ride. So many people buying call options also caused the people selling those options to the Robinhood crowd to buy the stock in order to hedge their bets.
One of the byproducts of both Robinhood and WallStreetBets has been the popularization of trading options by retail traders. A stock option is a derivative that gives you the right to buy or sell 100 shares of stock in the future at a set price. The price you have the right to buy or sell it at is the “strike price.” The option has an expiration date. It also can be…
