16 Feb GameStop (GME) Explained: What Happened and Why?

On January 12, GameStop‘s stock price began its parabolic rise to historic highs, trading from $15 share price in December to a peak of $467 per share. This move has made traders a fortune, but it wasn’t the suits on Wall Street profiting off of what has been a more than 700% boost in share price in just one week. So what happened to cause this spike?

Wall Street Bets – Reddit

To start understanding why happened, you first need to understand the Wall Street Bets community on Reddit. This is a community who discusses equities, positions, what they are buying; all while sharing ideas withing a  community atmosphere.

In 2020, a user posted about GameStop having a 140% short interest (people betting against the value of the company) and suggesting this is a candidate for a short squeeze (where buyer push the price higher, forcing the shorts to cover their position for a loss). Fast forward to February 2021, the squeeze was on.

As price started to move higher, the community discussion also increased, ingesting more buyers to put their money at risk to capture some of the move. AND IT DID GO HIGHER.

At this point we all know what happened, price spiked to $450+, and is now trading down at $50. So why are we back at $50. To understand this, we need to look at the mechanics of a short squeeze.

The way a squeeze works is simply there is more demand than supply. Meaning, there are more people trying to buy, then people trying to sell. Put in another context, if you go to the supermarket and buy a gallon for milk for $5, and suddenly there is a huge demand for milk and all the milk is bought off the shelf. The milk suppliers then have a hard time restocking the shelf’s because ever time time they do, the milk is bought. This then causes people who really want milk to pay a higher price just to get their hands on it…. and this continues as long as buyer are there.

Now back to GME, when a squeeze happens, it is 100% based on people filling the bid, and buying the offers. As price goes up, people need to continue to buy in order to keep the demand high. As soon as this is void, the price will waterfall back down to where it was trading prior due to the fact that the stock ran based on demand vs. core fundamentals. GME is not a winning company long term, so having the value at obscene prices will not bring in sophisticated investors. Anyways, I’m rambling here, buy you can hopefully see how a short squeeze works.

If you participate in these, the first thing you need to remember is to have an exit plan. You don’t want to be in a boat with a bunch of the Wall Street Bets kids holding GME as it drops 70% in a day. Goodbye Grandma’s money. Scale out as the stock trades higher, and never hold it over night.

Jeffrey Malinovitz