![]() While the short sellers were trying to cover, many retail investors also joined in the buying of GME stock due to widespread efforts of individuals on social media platforms to encourage others to buy GME stock, as well as market makers that sold call options looking to hedge out risk. This process can be repeated until over 100% of available shares are sold short. For example, Investor A borrows 100 shares from Broker X and then sells the 100 shares to Investor B Broker X then buys those shares from Investor B then Investor A borrows those same 100 shares again from Broker X. 7 Now you may be wondering how it is possible for short sellers to short over 100% of the available shares of GME? Well, it is possible for one share of GME to be sold short multiple times. The short interest reported at this time was roughly 138% of shares available for trading. This news caused an increase in the price of GME stock and forced many short sellers to frantically purchase shares to cover their short positions. In the case of GME, on January 11, 2021, GME announced that Ryan Cohen, co-founder of Chewy and former CEO, was joining its Board of Directors. As the price of the stock rises the more options are sold creating another feedback loop that adds to the increase in a stock’s price during a short squeeze. This further reduces the number of available shares short sellers can buy when forced to cover during a short squeeze. When a short squeeze is over the price of the underlying company’s stock typically falls quickly and sharply due to a lack of fundamentals justifying the massive price increase.Ī gamma squeeze results from market makers hedging out the risk associated with selling options by buying the number of shares required under the options contract. This sequence of events is known as a short squeeze. To make matters worse, as the price goes up, more long investors purchase the stock in the hopes it keeps going up in price which removes more of the available shares the short sellers need to cover their position driving the price even higher. In the event a large number of short-sellers are forced to cover their short positions and there aren’t enough shares available, short-sellers must bid up the price to ensure the purchase of enough shares to cover his or her short position. Keep in mind that there are a fixed number of shares available to trade in the public market, and there are even a few shares available to trade if you take into account the shares purchased by investors holding long term. ![]() Short selling also comes with added risks including limitless losses 5 and forced buy-ins 6. (See Figure 1 for an illustration of short selling). ![]() To do this, an investor typically borrows shares of a company from a brokerage firm and immediately sells them in the market with the hope that the share price will decline and he or she can buy those shares back at a lower price and return them to the broker. What is a Short Squeeze?įirst and foremost, a short squeeze could never happen without the ability to sell short shares of a company. In the span of 15 days (January 12 – January 27, 2021) shares of GME were up almost 1,800% due to a rise in retail investors 1, use of social media forums to discuss trading strategies 2, a rise in options trading volume 3, and a massive short interest of 138% 4 of the float. The speed and magnitude of the increase in the price of shares of Gamestop (GME) and a handful of other company’s stocks with high short interests, dominated news headlines in January 2021 due to a resulting short squeeze and gamma squeeze.
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