Market Updates - The Big Short (Squeeze)
Speaking of moons and getting bored, you may have heard about the latest crazy thing to happen in the stock market. A bunch of internet day traders from the WallStreetBets subreddit recently decided that it was time to send GameStop stock "to the moon!" They collectively bet up the stock that hedge funds had shorted. And the hedge funds ended up losing billions of dollars in the process.
In case you don't want to do an internet search for "naked shorts" to understand what happened, here's a brief summary of the events that led to this craziness. We'll start with a chocolate analogy:
1. "Shorting" chocolate is when you borrow a bar of chocolate from someone and promise to give it back later. You're paying interest on your chocolate bar the whole time you have it "rented out". But you sell the chocolate to someone else for a dollar, thinking that the price will go down. If the price goes down to 75 cents, you can buy it back at the lower cost and return the borrowed chocolate, thus making a cool 25 cents profit (minus whatever interest you've paid).
Note that this only works when chocolate prices go down. If they go up, you are forced to buy a replacement chocolate bar at a higher cost, or keep paying interest on the chocolate loan and hope the price drops eventually.
2. Naked shorting is when you sell a bar of chocolate without borrowing it first. You're essentially selling the promise of a bar of chocolate, thinking that you'll have time to buy the chocolate later on the way to deliver it. Only the chocolate doesn't exist in your hand yet. You wait a bit, hope that the chocolate price goes down, and scramble to buy it quickly and get it to the person who bought it from you before the SEC notices.
This is illegal, and it's also very risky. Because if chocolate prices shoot up, say, 1700%. you may be forced to buy a really expensive bar of chocolate in order to make good on your promise.
3. Whether or not there was naked shorting of GameStop stock (the investigation is ongoing), it was clear that there was a TON of short interest before this blowup. Everybody was pretty much sure GameStop was going to go the way of the dinosaurs, and thus hedge funds had shorted GME stock a whole heck of a lot.
4. The subreddit WallStreetBets decided they liked GameStop, and started buying up a ton of the available shares of GME. This caused a "short squeeze" among the hedge funds, since they were losing money every day to interest, and as the price rose, it got even harder for them to close out their short positions.
In short, they needed to buy chocolate, but Reddit had bought up all of the chocolate bars, and they weren't selling.
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