Finding Nemo in the US stock market, a thread.....

Below I summarise (with exhibits) last night’s most fascinating podcast delivered by @FinanceGhost / @MohammedNalla on the dramatic events that engulfed GameStop or $GME for short (pun not intended) in the piranha infested waters of the US equity markets. 1/6

Basics first: on a unleveraged Long Position (i.e. you bought a share with own cash) trading profits are potentially infinite as price may keep rising to your favour. Example: as at 27the Jan, $GME had added about $22.9bn in market cap. 2/6

But on a Short Position (i.e. borrow shares, then immediately sell to the market) your gains are finite as Stock price can get to zero, limiting your gains but the losses can be unlimited as Stock price can double, triple, even quadruple. This is a short-seller’s nightmare. 3/6

A frenzy to buy back the stock to cover rising losses as the price runs away ensues increasing demand for the stock, driving a price even higher, creating a feedback loop called a short squeeze. In $GME case, 2 days ago, the short positions were 100% more than its float). 4/6

On the derivatives side, option traders had written Call Options on $GME (obligation to deliver $GME shares at a pre-agreed price, i.e. ‘Strike Price’). As the stock price closed in to their Strike Price, traders were forced to hedge themselves (i.e. buying more $GME stocks). 5/6

At this point short-sellers and Option traders on $GME were scrambling for dear life as @MohammedNalla put it “trying to find Nemo” in the bloody waters of the US stock market fraught with a very shallow pool of $GME shares (see float table on thread point #4). 6/6

I will try to do a post next week about $GME ‘s impact on ETFs, a missing angle in the current discussion.