GameStop: hitchhiking soon, but there will be more

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After a week of madness on GameStop, Wall Street professionals see only one way out for small investors who have taken the title of the video game seller to more than $ 482 last Thursday, 25 times higher than in early January. According to these shrewd observers, the rise in the share will stop because hedge funds that bet on the downside will hedge their positions and take their losses, so they will no longer need to buy the title. With the stock losing its explosive side, small investors will be tempted to take their profits. The tide that pushed the price up will reverse, with an equally powerful effect.

David vs. Goliath story end? Not so sure, because the millions of stock marketers who got excited for GameStop may not have been content to follow basic advice on sites like Reddit and multiply brainwashed messages based on emojis. Other specialists, including Nicolas Roth from Reyl Bank, believe that they are on the contrary particularly sophisticated.

Read also: GameStop, the stock market absurdity of the moment

“Squeeze range”

In general, these stock marketers have noticed that several large hedge funds had bet heavily on the decline of GameStop. And probably excessively, given the limited market capitalization and liquidity of the company. These traders realized that they could win a lot, while their “adversaries” – the hedge funds – had a limited prospect of winning (the stock cannot go below zero), but unlimited risk (the stock. can go up indefinitely).

To take advantage of this asymmetry, the Davids of the markets have created a movement by multiplying the posts on Reddit and betting on the rise of GameStop via short-term options. These call options meant that the brokers who sold them to small investors had to protect themselves by buying the stock. The more its price rose, the more brokers had to acquire the stock, fueling its progress, in a situation called “gamma squeeze” in financial jargon. These options also make it possible to support a position which evolves unfavorably by reinvesting limited amounts. Finally, the rise in GameStop shares forced hedge funds to hedge their positions by buying in turn, pushing the price further up.

Read also: The soap-opera GameStop worries the authorities

If these day traders have taken advantage of this opportunity, methodically and coldly, they will be able to repeat the operation in the future, with other actions. If they continue to act in concert – this is perhaps the most difficult condition to fulfill – they could represent a force which would weigh, at least episodically, on the market.

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