How did You Get to the Bubble in the Price of GameStop Shares

The first reason for the big bubble in the share price of GameStop is the so-called short squeeze – when with a sharp rise in the share price the upward movement continues due to the closing of positions by the short sellers.

At times, GameStop had about 140% short interest (the number of stocks that were sold short but not yet covered or closed), which means that there are not enough stocks available for everyone to cover these high-risk positions. It should be noted that in short positions, when the share price rises, money is lost, in which case additional collateral must be paid to the broker or the position must be closed. Closing the short positions is done by buying back the shares of GameStop, which increases the price.

But the real reason for this rally is the gamma squeeze (transitional price increase) in the options market. The scale of the short-term options helped with this bullish effect, as options dealers had to buy GameStop shares to return to a hedging position. Gamma squeeze is often seen in the market when one hedge fund chases another, and billions of dollars are needed for such an operation.

What WallStreet Bets users have done is come together and make extremely overvalued market bets, forcing marketmakers (people who are constantly present in the financial market with the intention of trading at their own expense, buying and selling financial instruments against their own capital at prices set by them – ed. note) to buy back shares of GameStop, the more the price per share increases, the more marketmakers have to buy shares (gamma ramping). This leads to an increase in price.
The third factor was passive funds. GameStop is part of Russel 2000. The weight of GameStop in the index rose from about 0.02% a few months ago to 0.5%, making it the heaviest in the index. This forced passive funds such as BlackRock to buy more shares of GameStop.

All this led to forced buying.

What happened yesterday? Forced sales – retailers’ accounts were closed because brokers said they could not handle the exposure, that it was too risky and the spreads were too wide. Yesterday the most active were the positions of put options with a fixed price  between 1 dollar and 0.5 cents. According to some traders, when hedge funds close their short positions, instead they buy long positions because they do not have this disadvantage that the short position has – unlimited loss.

These actions inflamed the anger of the WallStreetBets community.

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