The Gamestop (GME) Drama | BullsInvest.com
The Gamestop (GME) Drama | BullsInvest.com

Since we live in a period in which the price of some tradable assets shows a trend that tends to be defined as a speculative bubble, today we dedicate a few paragraphs to one of these phenomena: the share prices of the $GME (GameStop Corp New) company. Which, for the moment, is more of a non-stop, and we will see who will remain in the hands of the match.

GameStop is a physical store chain that sells video games, both new and used. Something from the old economy, in practice, which with increasing difficulty resists online play. A relative of Blockbuster, to make you understand better. Which appears destined to do the same thing. In fact, its financial statements have been closing in the red for some years and it is not expected to return in profit until fiscal year 2023.

π‘©π’†π’‚π’“π’Šπ’”π’‰ 𝒐𝒏 π’…π’šπ’Šπ’π’ˆ 𝒔𝒆𝒄𝒕𝒐𝒓𝒔

What happens when a company appears to be on a non-reversible path of decline, at least in the current business model? That investors speculate lower on his shares, selling them short. That is, the new ones on loan and sell them, counting on buying them back at a lower price.

GameStop is among the best-selling companies due to its business model in apparent irreversible decline. What happens at this point? Retail investors who arrive on the scene, helped by the zeroing of commissions by brokers, by the possibility of investing even very small amounts, by word of mouth of social media and by the considerable free time allowed by covid.

Which organize themselves into real swarms of bullish locusts on social networks like Reddit. But how do they operate? Preliminarily, they identify stocks that are heavily short, i.e. sold short. Then, they buy call options, which are contracts that give the option but not the obligation to subscribe for shares at a given strike price and by a certain date.

π‘Άπ’‘π’•π’Šπ’π’π’” 𝒇𝒐𝒓 𝒂 π’‡π’†π’˜ 𝒄𝒆𝒏𝒕𝒔

Small social locusts buy options whose strike price is much higher than current quotes, i.e. deep-out-of-the-money, and at rather short maturities, often no more than a week. Such options cost a few cents. The game consists in the possibility that their price, before expiration, goes up by those equally meager cents which, however, would determine capital gains of high percentages for the buyers.

What happens when many people buy call options on a stock? That many others, in their counterpart, have to buy the underlying stock. The price of which begins to rise. The repurchase of a heavily short-sold stock can cause an avalanche of buybacks, so-called hedges, where sellers are forced to buy back to avoid losing money.

𝑩𝒆𝒂𝒓𝒔 𝒔𝒒𝒖𝒆𝒆𝒛𝒆𝒅 𝒕𝒐 𝒃𝒍𝒐𝒐𝒅

In short, what is called short squeeze is created. That is, literally, short sellers are squeezed, sometimes to blood. The price rises and, given the conditions described, sometimes this happens explosively.

Here, then, that buyers of out-of-the-money calls can make big gains by literally beating up short sellers. Well, cute, you say. So what? So, in all this whirlwind of actions and reactions, between derivatives (the option is) and underlying, have we lost sight of the basic concept? How much is the underlying share "worth"?

Excellent point, if the value could still be determined in an "objective" way or better, if it "needed" someone or something. To identify this magnitude, that is the target price of a share, analysts' reports are usually compiled, which tend to be distributed with relative homogeneity around a consensus value, based on expectations of discounted profitability. Obviously, the analysts are not the Oracle of Delphi but the consensus expresses a "rational" methodology, given a set of scenario hypotheses.

To give you an idea, GameStop's median target price is currently around $ 12. GameStop shares closed at $ 77 yesterday, after hitting a high of over $ 140 today.

π‘«π’–π’Žπ’ƒ 𝒗𝒔 π’”π’Žπ’‚π’“π’•

etail bettors, often referred to by the suggestive name of dumb money, take the luxury of making smart money lose money, that is to institutions, which based on fundamental valuations had opened bearish positions on certain stocks.

And that's not all: when the swarm of bullish locusts heads for stocks of healthy companies, such as Big Tech, causing prices to rise with the same method (the options), the institutions must decide whether to go along with them, or better to chase them, that is to buy the title, or to counter them, taking the opposite position.

𝑨 π’π’†π’˜ π’π’π’π’Šπ’π’† π’ˆπ’‚π’Žπ’†

Whatever the case, there is reason to believe that these too are phenomena facilitated by the enormous circulating liquidity, and that must be discharged somewhere. In this facilitated, as mentioned above, by new technologies that have "democratized" access to markets, causing their costs to drop.

It remains only to understand how, and when, a stop will be imposed on the game. Probably from reality before market regulators.

Researching Investments - Research is a part of an investor's due diligence. Whether you work with investment professionals or on your own, it's wise to do your homework. Stay away from FOMO!

Source: eToro

Like what you read? Share it

Will you join the Bitcoin revolution? It's up to you to get on board the crypto train! To do so, and start learning about this exciting world, don't wait to create an account on Binance, the leading Bitcoin and crypto exchange. Click here to signup and safe from the trading fees.

img
img

Nathan George

Blogger and Influencer

Related Post