There's shortly going to be chaos when everyone learns a basic lesson: you have to sell into strength, not weakness.
When the stock hit $100, people bought. Same at $250. It'll be the same at $420.69, $1,000 - whatever. But whenever it crests, it'll sink FAST. A sell order at $1000 will get filled at $200. Everyone knows it.
Which makes for an interesting collective action problem: you have to hold hold hold - and then be the FIRST to dump. Not the third, the FIRST.
Short term, the price spikes as the hedge funds collectively go "would you take $300? How about $400? $1,000? $10,000?" and eventually enough people sell.
If they don't (let's say there's no price they'd sell at), a few things can happen:
The short-seller can sell their short position directly (transfer liability) to someone who thinks they can convince the stockholders.
The Company can issue more stock, diluting all shareholders, and sell to the short-sellers.
The short seller simply goes bankrupt, at which point liability gets settled in court (details depend on how they shorted, middle-men, etc.) - other people like brokers could get dragged into this too as they may guarantee the trade.
> The Company can issue more stock, diluting all shareholders, and sell to the short-sellers.
It seems to me that most of WSB crowd forget this kind of things.
IDK but another sane option would be that the regulator just pause trading on such stocks "until further notice" (I don't even know whether this is possible, but I guess that politicians can do whatever they agree to and pass a law or regulation)
Even if they don't, even if the funds go bust, only the early sell-offs from WSB will profit, while diamond-hands might be left with tons of $15 stocks that they paid $350 for...
Possible, but extremely unlikely. I heard a lot of the short contracts have an expiration date of Friday. No idea if that's really true or not. Issuing new stock has a long lead time. If it wasn't in the works a month or two ago, it won't happen in the next few days.
That is probably referring to options, not short sales. During a short squeeze the effect is basically the same, whoever sold "naked" call options will have to buy shares (or buy back the option, or buy some other option to offset the loss) to cover their position. Like short sellers, people who sell naked calls will start facing margin calls from their brokerage and will be forced to close the position at whatever price they can find (either for the options or the shares they would have to deliver if the option is exercised).
Brokerages would be in a lot of trouble if literally nobody was willing to sell at any price. When someone sells short, they must borrow shares; usually a brokerage will facilitate this by borrowing shares from another customer, who can receive some interest payments. If nobody was willing to sell at any price, the short seller would be unable to close their position before going bankrupt; but the other customer, who was long, would still be owed shares. In this case the brokerage must assume the short position, for a potentially enormous loss, and would have to continue paying interest to whoever the shares were borrowed from.
Most brokerages would not allow a short position with such poor liquidity -- they would force the position to be closed to avoid taking on that kind of risk. Forced buying is exactly what is happening right now, as the price rises short sellers wind up with margin calls and are forced to buy at whatever price they can get (or they must deposit other cash or securities to offset the losses in their margin accounts). That drives the price higher and triggers more margin calls and more buying, until eventually all the shorts have been forced to close their positions. Brokerages will likely raise the margin requirements for a symbol like this to avoid a situation where a short sellers end up bankrupt with negative account values after closing the position (which means the brokerage will take a loss). Note that raising margin requirements will accelerate a short squeeze, since it creates more margin calls, but brokerages would rather get the positions closed sooner than later.
There's always about the same amount of money bidding above and below the current price. The market maker keeps it in balance, by matching buy bids and sell bids which are close to the middle of the range. This matching process sets the price and makes sure that there is always liquidity.
The price may shoot way up, or plunge, but this process almost always works, so there's almost always liquidity.
It is not hard to find low-liquidity symbols, though typically these are smaller companies or unusual products of some sort. I have seen brokerages declare some symbols to be restricted in some way (higher margin requirements, or not eligible for margin at all) because of poor liquidity. Market makers do not always swoop in to provide liquidity and may not be willing or able to trade large enough numbers of shares to satisfy investors during extreme circumstances (e.g. during a crash or a short squeeze).
Even if short-sellers are forced to buy 140% of the existing stock, while much of the stock is in the hands of people who refuse to buy? There's way too many buyers and too few sellers. And the buyers are forced to buy.
> Given that there is more shorts then actual stock. Would it mean that the shorts would be forced to take a loss and buy that stock?
Yes, that's what a short squeeze is. They are losing more and more money as this goes up, and at some point they won't have more money to lose. They'll have to buy (in order to cover their short), which will further drive the price up.
For the people who aren't shorting they can just hold it (indefinitely theoretically), but the people who are shorting it have contracts that will expire, thus they have to buy up more shares to counteract their shorted contracts?
The way shorting is done, is you borrow shares from someone who owns some, and then you sell it. You now have cash. Later, you can go and buy it from someone (for hopefully less than you sold it for) and return the share. You keep (or lose) the difference.
So yeah, if the long holders just keep holding, it'll keep going up and those that are short will owe more and more to their lenders (and paying more and more in interest, I think). Even if they want to cover their short, there's not enough shares to go around for them to buy. This is why it's being called an "infinite squeeze". They've shorted the stock more than there are actually shares out there, so it's difficult to cover.
There's some more factors at play when you consider option contracts, I think.
I don't see that's there's anything magical about 100%. In a short squeeze, the shorts buy stock on the open market at a high price and immediately return the stock. Some of this stock will find it's way back onto the open market. The shorter can buy that same stock a second time at a different price and immediately return it.
The real key is daily volume vs. volume shorted.
Shares outstanding - about 70M
Daily volume - about 24M
So if shorts were the only ones buying, it would take about 3 days of normal volume to unwind their positions.
But with the price going up, many others are competing with the short sellers to buy shares right now. So volume will go up and/or it will take longer to unwind.
Recently, the daily volume has gone up to 110M shares. A lot of those shares are being bought and sold more than once per day.
There's nothing magical about 100% of outstanding shares.
But it's a huge problem that the shorts outstanding are so high relative to daily volume.
Options can be used to create a position that behaves like a short, except without the cash being deposited and without having to pay interest on borrowed shares. Sell a call and buy a put with the same strike, and choose the strike so that the call premium equals the put premium.
selling a naked call requires quite a lot of margin, and akin to short selling stock - the downside is unlimited. Your option just doesn't go to zero, it starts at a negative value (what you got for selling a call) and can go to either zero and you get to keep that tiny premium or rip your face off when things like gamestop happen.
People have already forgotten Optionsellers.com it seems
The same is true of short selling. Like I said, short call/long put is equivalent to a short sale (of 100 shares). How much margin is required depends on the type of margin account an investor has and what their other positions are (for some account types).
The SEC will step in and force GME to issue more shares is my guess. GME won’t care and they probably will collect a nice premium on what any CFO running a company like GameStop would dream of.
A while back Elon Musk joked that the price target for Tesla was $420.69. The number 420 has historically been associated with marijuana use, claimed to be a police radio code for possession of narcotics (despite no police department found to be using it). 69 is associated with a sexual act.
Since Musk tweeted about it, that price target has stuck for Gamestop.
I made some decent money holding puts the last few days. I would bet you're not alone in your thoughts, but I also wouldn't bet on when this will actually happen.
When the stock hit $100, people bought. Same at $250. It'll be the same at $420.69, $1,000 - whatever. But whenever it crests, it'll sink FAST. A sell order at $1000 will get filled at $200. Everyone knows it.
Which makes for an interesting collective action problem: you have to hold hold hold - and then be the FIRST to dump. Not the third, the FIRST.
WallStreetBets will be anarchy...