Not exactly, I probably explained this badly. You don’t exactly “own” them in a covered short, but they’re designated for you to buy. You have borrowed an asset that might appreciate so much that you can no longer make interest payments, and your broker may force you to sell it back at the (higher) market price.
Naked shorts don’t involve the underlying asset, so they’re incredibly prone to abusive market manipulation, and were outlawed in the US in 2009.
Options also can be covered and naked. The same principles apply, except it could be buying or selling, and the buy/sale prices as well as the expiration contract are explicitly determined when the option is written. Naked options are still legal, and I believe naked puts are specifically what folks are so angry about in the GSE case (I am still getting up to speed).
So I think there was some crossover in talking about naked/covered shorts vs naked/covered options.
Here is a pretty good video that goes over it. Beware: hedge funds are not the good guys looking out for the little people.
I wish I could remember the company that changed the wording of their agreement and put in that arbitration was needed to resolve any disputes. After several thousand people went to arbitration over something, the company went to court to try and get it changed into a class action case and were denied.
Okay, but I think these ongoing expenses are an important point. They add a time element to this situation. People can’t just keep postponing a resolution until more favorable circumstances develop.
So is there some sort of relevant deadline tomorrow?
You’re probably thinking of DoorDash, who found out that if enough workers (in this case) are willing to pay their part of the arbitration fees, it can really cost you:
Agreed. There is historically far too much of this bullshit that goes on… along with these short sellers populating investment forums and trash talking a stock to depress the price. (without disclosing they hold a short position). It’s unethical. And happens all the time.
They really have just been hoisted by their own Petard.
LOL, “speaking fees.”
The image that popped into my head about this whole story…
Yup. Or hitting a big wasps nest with your backhoe. Think those tons of metal gone help you?
What has stopped this kind of thing from happening in the past?
Putting aside supposed good guys and bad buys, what happened was some hedge funds saw a situation where they thought they could make money by short-selling a company’s shares. And a bunch of individual investors saw a situation where they could make money by buying up the shares of that company and interfering with the short sales plan.
I’m sure there have been numerous times in the past when some hedge funds were short selling a company. And that must have left them vulnerable to the same thing that’s happening to Melvin Capital and other hedge funds this week. Even if there wasn’t a pool of individual investors, there would have been rival hedge funds that would have seen these opportunities. And those rival companies could have done the same thing the reddit investors are doing now.
So why didn’t they? Is there a gentlemen’s agreement among hedge funds not to attack each other in situations like this? Is there something unusual about this short sales plan that doesn’t exist in most similar plans? Do hedge funds avoid doing what the individual investors are doing because they know it’s not as good a plan as it appears?
This is a bit of a tangent, but those arbitrations are managed by these guys. Honestly, they seem great. I hope that helping people protect their interests turns out to be a good business model for them.
Market reform allowed investors to know when there was a lot of short interest in a particular stock. Exchanges also started paying brokers to direct trades to their exchanges instead of charging broker execution fees (why they do this is a discussion for another thread). This meant that brokerage firms could offer “commission-free” trading to newbie investors just to earn the exchanges’ rebate revenue, which attracted a lot of newbie stock investors. And a lot of people who were occupied by jobs now find themselves at home all day with time to watch financial news and read investing websites (whether because they are working from home or laid off). And the internet and social media made it possible for small groups of individual investors to coordinate their actions to take on hedge funds with a lot of short interest. Plus, for every thing that has happened, there had to be a first time. It’s hard to say, “this one factor is what made this possible.”
Nothing, it’s happens pretty much every day, but on a much smaller scale and flies under pretty much every radar.
Absolutely not. If there’s blood in the water (and rumors spread quickly) other market participants will absolutely go in for the kill.
A coordinated attempt to manipulate the price of a security is likely going to run afoul securities regulations. If there were just a handful of actors influencing the market, the regulators would have a pretty easy time tracking them down and fining them. What’s happening now is unprecedented in that there is likely hundreds of thousands, if not millions, of individuals acting in concert with no clear leadership. Legal precedent on how to treat this doesn’t exist to my knowledge.
Options expiration.
There’s a whole different level to the short squeeze going on in GME when you consider the options markets. Options market makers are stuck in a huge gamma squeeze due to selling out-of-the-money call options.
A put option is a contract that gives the right to sell a stock at a specific price. Puts can be thought of as downside insurance. Eg: An investor has 1000 shares of ABC stock which is trading at $10 and wants to protection if the stock drops, but they don’t want to sell the position in case it goes up. They can buy a “protective put” on the $10000 of shares at a price they want to lock in a sale - say $8. A market maker will sell them that put (insurance policy) for some price (premium) - let’s say $250. If one day the stock has bad news and opens up at $4, the investor can exercise the put and sell the shares to the market maker for $8 (who then is looking at a $4000 loss on the position). If the stock instead continues to go up, the market maker pockets the premium and the investor holds the shares.
Options pricing is pretty complicated and the guys who created the Black-Scholes pricing model won the Nobel Prize for it.
A call option functions exactly like a put option, but goes the other way. A call gives the option buyer the right to purchase a stock at a specific price within a specific time window.
In the case of GME, options market makers have sold a large amount of way “out of the money” (the right to buy at a very high price) calls and have had to deal with these calls becoming “in the money.” Essentially, when GME was trading at $9 a month ago, market makers sold the right to buy GME at $50 for pennies. With the price of GME now $200+, those calls are worth $150+ and the market makers have had to scramble to buy stock to deliver to their options trade counterparties.
Thanks!
Y’all need to understand something right from the start.
You’re about to see a whole bunch of hit pieces in the media targeting small investors. When the rich take the poor’s money, it’s investing. When the poor take the rich’s money, it’s stealing.
It’s already out there. You’re seeing all kinds of articles about Gamestop being in a bubble…says who? Who says it’s not worth $400 a share? What makes you think $400 is unfair but $4 is fair? If you haven’t done your homework, and you think it’s worth single digits, one of two things is true: either you believe that Wall Street’s favored price three weeks ago was the ‘correct’ one and the actual price in front of your face is the incorrect one, or you just read somewhere that that’s the case- that Gamestop is overvalued and the real price is under $10 - and you just decided to believe it. You’re being manipulated. Plain and simple.
Second, do not for a second believe it when the media tells you the brokerages need to protect us “idiots” and “gorillas” (thanks, SDMB, for swallowing the lure) from “gambling” our “life savings.” There’s no evidence we’re any dumber than any hedge fund manager that cannot outperform a dart-throwing monkey. We’re not gambling, we’re taking calculated risks. Thirdly, there’s no evidence anyone (in substantial number) is betting their life savings and risking financial ruin. Most people are using play money. And winning.
Watch out. In the coming weeks, you’ll see a whole lot of “journalists” in financial media demonize retail investors like me for sticking it to the hedge funds. If I donate $200 to a food bank so poor people can eat, they’ll pat me on the back. If I donate $200 to Gamestop so poor people can eat the rich, they’ll outlaw me. Do not let them.
C’mon, let’s face a little reality here. GameStop shares rose in value 1900% in less than a month. That has nothing to do with the value of the company changing; they aren’t doing anything different.
This is about investors trying to outmaneuver other investors. GameStop is just the football you guys are playing the game with.
The best explanation I’ve seen:
tl;dr
It’s two things: a kind of anarchic internet LOL, fucking with the system and screwing the hedge funds…
…and kind of dead serious about exploiting the system to make a lot of money, at the same time.
Someone is going to be left holding the bag. It’s just a matter of who that is. Presumably it’s going to be the short sellers who got in early and the buyers who got in late. But with the brokerages enacting restrictions who knows how things will play out.