Basically they're collaborating to force the hand of the hedge funds, independently without an organization. Hedge funds with short positions need to buy shares. They have a debt that has to come due. Everyday they don't pay, they pay interest on the outstanding shares. The higher the price rises, the more money the shorts have to pay in interest. The more they pay, the deeper the hole they get in and the more return they need from the eventual collapse.
By refusing to sell, the WSB guys are arbitrarily pushing the price higher and higher. The longer they hold the line, the more they force the hand of the short sellers. It's a classic "short squeeze", but it's unique because it's driven by retail investors instead of other hedge funds. It's just like how workers pushed to the brink can refuse to work and cost a business money, even if it means losing a paycheck.
Unfettered Greed baby! "Haha infinite potential loss? That would never happen TO ME!"
Edit: more seriously, options come with premiums and can still lose you money even if the stock did in fact go down (i.e. You buy a PUT for $5, the stock is at $4 currently, but the PUT costs you more than $2 because there is a premium to pay based on a bunch of Greek alphabet astrology, so you'd only make money if the stock goes down to $3 or less)
On the whole, buying options is a losing proposition. Options were literally designed as insurance against unfavorable moves. What happens with insurance companies? They usually make a whole fuckload of money. It's those long tail, black swan events that wipe them out.
Basically they're collaborating to force the hand of the hedge funds, independently without an organization. Hedge funds with short positions need to buy shares. They have a debt that has to come due. Everyday they don't pay, they pay interest on the outstanding shares. The higher the price rises, the more money the shorts have to pay in interest. The more they pay, the deeper the hole they get in and the more return they need from the eventual collapse.
By refusing to sell, the WSB guys are arbitrarily pushing the price higher and higher. The longer they hold the line, the more they force the hand of the short sellers. It's a classic "short squeeze", but it's unique because it's driven by retail investors instead of other hedge funds. It's just like how workers pushed to the brink can refuse to work and cost a business money, even if it means losing a paycheck.
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Of course, the real winners are the ones the hedge funds are paying interest to.
And possibly whatever fund is paying Robinhood for trade info so they can front-run it with HFT.
Is there a reason why funds buy shorts instead of put options? Seems a lot risker
Unfettered Greed baby! "Haha infinite potential loss? That would never happen TO ME!"
Edit: more seriously, options come with premiums and can still lose you money even if the stock did in fact go down (i.e. You buy a PUT for $5, the stock is at $4 currently, but the PUT costs you more than $2 because there is a premium to pay based on a bunch of Greek alphabet astrology, so you'd only make money if the stock goes down to $3 or less)
On the whole, buying options is a losing proposition. Options were literally designed as insurance against unfavorable moves. What happens with insurance companies? They usually make a whole fuckload of money. It's those long tail, black swan events that wipe them out.
Thanks!