Will the GameStop (GME) Short Squeeze Continue?
How WallStreetBets and Retail Traders are Beating Wall Street at Their Own Game
GameStop stock (NASDAQ: GME) skyrocketed to all-time highs Friday, as it popped 72% before closing the day at $65.01, or 46% above the previous day’s close. The jump in share price was driven by a short squeeze, as small retail investors on Reddit’s WallStreetBets and other social media sites upended large Wall Street institutions in a “David versus Goliath” moment for financial markets.
In this article, we’ll discuss the reasons why the short squeeze can continue and how you can profit from this trade.
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Why GameStop Popped
$GME has risen 200% in less than two weeks, based on news that Ryan Cohen (CEO of Chewy) would be joining the GameStop board and refocusing the company’s strategy in e-commerce.
The news fueled traders WallStreetBets and other retail investors to make risky bets on the stock, pushing the price to higher levels. (See article for an in-depth view of traders on WallStreetBets):
As the price doubled from $20 to $40, traditional Wall Street institutions such as Citron Research and Melvin Capital started to take notice and use their influences to short the stock.
The short attempts failed as 1.9 million followers of WallStreetBets made even riskier bets on GameStop, and used its influence on social media to promote their long positions while ridiculing anyone supporting the short side.
As of now, WallStreetBets has won the battle as prices have spiked to all-time highs.
While the long versus short battle will extend into the coming weeks, here are the reasons why the short squeeze will continue and move $GME to even higher levels.
Short Float
The short squeeze was initiated by GameStop having an unusually large short float that has accumulated since the start of the pandemic. At the time of this writing, $GME is the single most shorted stock in the US stock market with roughly 70 million shorted shares, or nearly 140% of the float. It will be difficult for institutional short sellers to add to their short positions that they typically do when a short squeeze occurs. Moreover, call option pricing was limited to $60 during Friday’s trading due to the spike. Monday’s trading will reopen with higher-priced options and any further purchasing will cause institutions to buy up more shares to cover their losses.
WallStreetBets Momentum
Having a high short float by itself is not enough to keep the short squeeze going. Critical to a short squeeze is having a strong momentum on the long side to counteract the downward pressure from short sellers during this period. In typical short squeeze scenarios, the momentum is often short-lived as long side buyers eventually sell to make a profit. In the case of GameStop, the momentum is remaining strong and even accelerating as the recent short squeeze to $65 is getting more WallStreetBets investors to make even riskier bets.
Generational Event
Looking beyond WallStreetBets, GameStop is becoming a generational event that’s sweeping the financial markets. More than just another stock that is going through a short squeeze, this is the first time traditional Wall Street players are recognizing retail traders and their influence on the market.
Looking ahead, institutional short sellers will be reticent to take on this challenge until the momentum dies and we see a clearing of the short float. For now, retail traders have won the battle. The little guy is supposed to be losing — except when it’s David versus Goliath.
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Happy trading!
The above references an opinion and is for information purposes only. It is not investment advice. Seek a duly licensed professional for investment advice. Content on this site is for educational purposes only.
