The Reddit-inspired GameStop shorting squeeze which we covered in more depth here and here seems to be coming to a predictable end.
Shares in most of the stocks targeted by the ‘Wallstreetbets’ Reddit forum are now way below the highs they achieved in the last few weeks of wild trading. The story all started back in January with the heavily shorted Texas computer games retailer GameStop.
As a reminder short selling involves taking a bet that a stock’s share price will decline. In this case hedge funds effectively borrow shares from someone else for a small fee, sell them to raise capital and buy the same number of shares again at cheaper price in order to return the stock to the original lender, keeping the difference in price as profit.
If the shares go up in value then the short seller will either have to put more cash into their trading account to keep the bet going or be forced to buy stock at a higher price in order to close out their position.
The forced purchase is known as a short squeeze and this is what the Redditors initially managed to engineer.
Given these shares soared purely for technical reasons rather than anything fundamental in the underlying business, once this short squeeze had played out, big falls were almost inevitable.
After all Blockbuster or BB Liquidating, the final remnant video and DVD rental chain which has been bankrupt for 11 years, even saw its stock surge.
