r/wallstreetbets - WSB gets emotional on Mad Money
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25,984 votes and 1,397 comments so far on Reddit

We should probably pay attention to this and start exploiting it instead of fighting each other. Start saving cash or blowing it on gamestop stocks

  • queenjamie [none/use name]
    ·
    4 years ago

    Right now $GME, our beautiful GameStop, has a short interest of over 100%, which means its being shorted for more shares than are available for sale. This is because GameStop is yknow GameStop and it went down to $5 over the summer, and a couple Wall Street firms shorted them a bunch back then. Since the stock is going up so much, they’re gonna get absolutely screwed when the shorts come in, which should be happening sometime on Monday and Tuesday of next week.

    I'm with you until this part. What do you mean by "being shorted for more shares than are available for sale"? I don't understand how this is possible.

    Let's say GameStop only has 100 shares. In this example how would it all work?

    • chris [he/him]
      ·
      4 years ago

      I’ll try and explain as best I can to my understanding, but as always I’m no financial professional.

      So, going with your example, let’s say at around June of last year, GameStop had its astronomically low share price of about $5, and some Wall Steet Firms (Melvin Capital) shorted it for let’s say, 75 shares. To do this, Melvin borrows those 75 shares at their current price of $5 dollars from a broker and sells them on the market. If the stock goes down, they get to buy those 75 shares back for less than they paid for them, and after selling them back to the broker they would earn a profit. If the stock goes up though, they still need to give those 75 shares they borrowed back to the broker, losing money in the process.

      Back around the same time in June, WSB caught wind of this whole short scheme and started buying up GameStop stock and holding it, to the point where there were, let’s say, only 25 shares available in total. Remember, Melvin never owned those shares to begin with, and sold them on the market, allowing WSB to buy them up to the point where they collectively hold enough shares so that the number of shorts Melvin needs to cover is greater than the amount freely for sale, the difference having been bought up by a bunch of people who don’t want to sell.

      Let’s imagine now it’s this Friday, which is the day that Melvin’s shorts have to be called in. They owe the broker 75 shares, but they can only buy 25 since the other 50 shares got bought up by WSB in the meantime. But, Melvin still owes the broker the 50 remaining shares that they shorted earlier, which is where the squeeze comes in.

      Because they owe more shares than it’s possible for them to acquire, they making them have to offer more and more money until WSB finally relents and sells them the 50 shares they need, and that can be as long as WSB can collectively hold out for. If they aren’t able to cover the shares they shorted, they’re majorly on the hook from the broker they owe those shares to, and their assets and stuff like that can be seized to cover the difference, to the point of bankruptcy at least. The obligation to buy the shares from WSB is whats driving the price essentially.

      Also, part of it is that the firms did something called “naked shorting”, which is selling shares to short that a broker doesn’t actually have and is super illegal, but that’s Wall Street for you.

      I hope that was a good enough explanation.