Sympathy? The fact is that GME has 150% short interest which should be impossible because you are supposed to have possession of the stock in order short it. So 100% should be the short interest limit and in practice should not come anywhere close to 100%. So there is clearly an issue that regulators are turning a blind eye to. If there is sympathy for GME I would think it is because there is such a high level of short interest that it makes it difficult for the company to raise capital due to low share price. In contrast, there is TSLA, a stock so massively overvalued that the company can raise as much capital as it wants, making what might be a pretty so-so business seem incredible. The real issue as I see it is that regulators allow hedge funds to get away with whatever they want while the retail investor gets the short end of the stick. And massively shorted companies get driven into the ground.
TSLA is a good short?
TSLA is a good short ask the all the shorts how they feel about losing 70B last year. The people who survive long term 20 years or more cap their risk. You can be a pig but hogs get slaughtered. That means manage the risk before the trade.
Cheers,
MV
I quote from Matt Levine here: “There are 100 shares. A owns 90 of them, B owns 10. A lends her 90 shares to C, who shorts them all to D. Now A owns 90 shares, B owns 10 and D owns 90—there are 100 shares outstanding, but 190 shares show up on ownership lists. (The accounts balance because C owes 90 shares to A, giving C, in a sense, negative 90 shares.) Short interest is 90 shares out of 100 outstanding. Now D lends her 90 shares to E, who shorts them all to F. Now A owns 90, B 10, D 90 and F 90, for a total of 280 shares. Short interest is 180 shares out of 100 outstanding. No problem! No big deal! You can just keep re-borrowing the shares. F can lend them to G! It’s fine.”
I’m long IWM PUT last Thursday to protect my long stock positions. I don’t see how this short squeeze ends. They pretty much got whole world’s attention. There is no winner/loser or we don’t even know what’s the definition of winning. Politician jumps in. What a chaos. And stock market’s overall valuation is high so it just gives it a reason to de-leverage for institution and retail investors market may dip further.
However, with vaccine’s good news comes in. Once this short squeeze ends market will shoot up. So I’m still in long but with some OTM put as protection.
gs3
Thank you Yuval. Good explanation.
So I am interested in how this might affect my long positions and the market in general (e.g., my ETFs).
Each person who sold (shorted) these stocks in the example got some money when they did it, no? Presumably they put much of that money to work in long positions.
But now people are closing some of their shorts positions, I assume. Either because they were forced to in a short squeeze or they see increased risk—at least for a while—and are reducing their short positions voluntarily. And Brokers (not just Robin Hood) are putting limits on all of this—forcing some people to reduce their positions (long and short).
This reduces the money available for long positions doesn’t it? Is the money being pulled out of the market significant? Enough to cause a correction? Is this one reason the market was down a little over the past few days?
Dan’s link even speculates about the possibility (unlikely in the author’s assessment) of problems with the clearing houses and presumably Robin Hood’s existence if it goes that far… I have no basis to add anything to what the author says on this.
But I have the same question, essentially, as Dan (danparquette). How far will this problem extend to the general market (if it has any effect at all)?
Jim
Dumb question: why should the shorts close their positions now? Clearly the stock is going to return to a much, much lower price at some time in the not-to-distant future. I guess the price can increase significantly before that though, so the shorts might struggle with margin requirements, but are there any issues other than that?
Great question.
Not really my area but I would just add that the Gamma Squeeze is a big part of this, I believe. This is people who provide options contracts buying the stock in large amounts to offset the risk of the options contract. With the options themselves being a type of leverage.
But as far as I know (understand) this just magnifies the margin requirements problem you raised. I am not aware of any other rational reason to close a short now. But to add complexity, many of the people who are “shorting” are actually using options contracts themselves (according to Cramer on CNBC). So I could be missing something.
More broadly, I think none of this makes sense or is even possible without the use of and the resulting problems from leverage (I think). I have not actually done any of this and am trying to understand it myself, however. Still, I wonder about the general reduction in leverage or possible systemic problems from over-leveraging and the possible effect on the market.
Robin Hood and other brokers/clearing houses are not restricting trading and options just to help their hedge fund friends. There are real concerns/problems with their leverage.
Jim
It’s been reported that the borrow fee on GameStop’s stock is up to 29.32% on existing shorts and 50% on new shorts. Owie.
[quote so the shorts might struggle with margin requirements, but are there any issues other than that?
[/quote]
Thank you for your question.
I have been thinking about buying commodities, Palladium (Pall), Gold and/or Silver (SLV) as inflation hedges.
But SLV is on the restricted buying list at Robinhood and Dan has mentioned that games are being played with precious metals.
SLV has had recent impressive gains. But as you point out that will be temporary and probably have a correction.
I will certainly not be buying SLV now thanks to your post.
I wonder if all of this is one reason momentum has at least changed as a factor recently. I actually do not find it useful for individual stocks and have removed it as a factor in my ports. Meaning momentum could, at times, be a sign of a sort squeeze that will be reversing in a big way soon.
On the other hand, PERHAPS, an earnings surprise may still allow as to be invested at the very beginning of a short squeeze. And somewhat oblivious as to why a stock may triple in a few days. I might have been oblivious as the why HEAR tripled a few year ago, for example.
I do not see how the DDM model could have worked as the sole explanation for the small earnings surprise HEAR had then.
Jim
Yuval - here is the layman’s version of the actual regulations on short sales: [url=https://www.investopedia.com/articles/investing/100913/basics-short-selling.asp]https://www.investopedia.com/articles/investing/100913/basics-short-selling.asp[/url]
“Your broker will attempt to borrow the shares from a number of sources, including the brokerage’s inventory, from the margin accounts of one of its clients or from another broker-dealer. Regulation SHO from the Securities and Exchange Commission (SEC) requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed (so that it can be delivered to the buyer on the date that delivery is due) before effecting a short sale in any security; this is known as the “locate” requirement.”
The key here is that it is the broker-dealer’s responsibility to determine that the shares can be delivered. Therefore, you can’t go above 100% short interest (in my opinion). Now my uneducated guess is that market makers are tromping all over this requirement when processing stock option orders.
“TSLA is a good short?”
TSLA’s market capitalization is more than all other auto manufacturers combined but has a total vehicle market share in the USA of 1.29%. Yet, I don’t see any complaints by retail investors that they have lost the ability to buy shares.
Steve,
Is that a “naked short” then? Real question. And if it is aren’t naked shorts also not allowed in all of the regulations? Truly a question that I do not know the answer to.
But I do wonder (as I think you do) whether Elizabeth Warren is not being completely objective in who she thinks the market manipulators may be.
Jim
I’m not an expert on this topic but if the spread includes a long buy of the same stock then it should be OK. This is a bit complicated however because the broker would need to ensure that the long stock was not previously borrowed by a short seller. Honestly, I don’t know how they deal will all of this in real life.
I believe TSLA stock is overvalued and should be only worth 25% of its market cap. How can I make money off of this without being squeezed out?
Probably the best possibility is to use an options spread. I won’t give you the details because I am not an expert in this area. But good luck with Tesla. I lot of people have lost money on it betting on the downside.
One key factor to keep in mind here is margin. If you have suffered a short squeeze you’re likely to face a margin call which will result in your long positions being sold. That’s one explanation for the sell-offs in the market this week.
Isn’t the government totally dependent upon Tesla’s success?
I guess this is a question but subsidies did continue for Tesla even under the Trump administration, I think. And who is going to actually implement the EV portion of the Green New Deal if not Tesla? People actually have to buy something for that to work out.
The GM Leaf had a lot of hype but can I even buy one used now? Where is the plug-in Prius? Apple keeps saying it will develop an electric vehicle but not all of their ideas pay off assuming they do (I use Kindle and not iBooks for example).
I do not keep up with this so I should probably just ask: is there anyone else that will plausibly succeed other than TSLA as far as making EVs more common than gas-powered vehicles in the future?
Isn’t this one of the most important things for this administration?
Anyway, until someone else can deliver you might find the FED buying Tesla bonds if they get into trouble. Or if that is not politically possible, taxing fuel if it gets the job done as far a supporting Tesla. Or something I have not thought of yet ruining an otherwise well-conceived shorting strategy.
If the government did do something further to support Tesla (if needed) it would not make even a very long list of things that have stopped surprising me recently. I would not even blink.
Jim
Yuval, I think so too—Jim
More games.
If you want to borrow shares to short GME, do no borrow them from Mark Cuban!!!: [url=https://www.zerohedge.com/markets/mark-cuban-presents-little-trick-creating-mother-all-short-squeezes]https://www.zerohedge.com/markets/mark-cuban-presents-little-trick-creating-mother-all-short-squeezes[/url]
The article does point out that there are competitors to Tesla (and more than one) which I did not know about and is unquestionably a very good thing.