Short Squeezing Gamestop (GME)

Photo by Tonik on Unsplash

How Retail Investors Crushed a Hedge Fund

The Stock Market is rigged. It’s rigged against the little guy and always will be. The Markets are not fair either, they’re dirty warfare and the simple fact is that the big guys almost always win. They have the money to move the markets, bid prices up (or down), and leave a short term little guy (like us) empty handed.

But sometimes the big guys get killed.

We all know the parable about the big fishes eating the little fish, but sometimes we forget that bigger fish eat the big fish too. You’re not safe, even if you think your size will protect you.

A short squeeze is a sight to behold, its like seeing the Northern Lights in Florida.

We see this in nature, the mighty hawk trying to strike a smaller bird. But then, the smaller birds all band together to chase away the hawk, leaving him hungry and harassed.

This exact scenario is unfolding in Gamestop Corp (GME) right now!

If you follow the markets you’ve seen the meteoric rise of Gamestop Corp. It was trading around $14 last December, only to close at $147 on Monday. Overnight trading has it around $339/share as of Tuesday morning.

Game Stop Stock Chart
Game Stop Stock Chart

What happened? Melvin Capital.

Melvin Capital, a large hedge fund (hawk) opened a short position against GME some time ago. This suppressed GME prices low and allowed them to make profits. Everything (allegedly) was going according to their plans until retail investors (little birds) from the Wall Street Bets Reddit group started buying GME en-masse.

The prices of GME started moving higher, faster than Melvin Capital could cover or adjust, creating a short squeeze. A short squeeze is where short sellers have to close out their positions to halt their losses. This cause insane volatility and the price shoots up even higher, trapping even more shorts and squeezing them out of their positions.

A short squeeze is a sight to behold, its like seeing the Northern Lights in Florida. Very rare and when you see it, it’s amazing.

This short squeeze could put Melvin Capital out of business. Selling short is a very risk (but lucrative) business. If Melvin Capital does fall it will have been a victory for the little guy but also a reminder that the stock market is brutal and rigged.

Disclosure: No positions in GME.

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