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MaduroBU wrote: ↑Tue Feb 02, 2021 8:45 pm I disagree with nearly everything that I have seen written about this story. I follow the idiots on r/WSB, and need to stress that there is a mix of reasonable and savvy young investors, people there for the entertainment, and complete fools. It is not some kind of collective; there is no cohesive ethos, and most of the serious posts involve the people with brains telling the fools not to leverage student loan money to buy meme stock options that expire in under 24 hours. Their ability to stage ANYTHING, much less a Big Short-style "People's Revolt Against Wall Street", is questionable at best and more likely ludicrous. Further, the people shorting GME are the value investors. Folks who try to value invest are usually looking to go long on companies whose value exceeds their price: the old Warren Buffet saying "Price is what you pay, value is what you get." If you find companies whose value misjudged by the market, you make a profit if you act before the market does. In a drastically overvalued market, shorts are sometimes the best plays. Gamestop is where Blockbuster was right before it died, and by any measure the stock price is headed to zero.

I was actively short on GME through all of this, and lost almost zero money (down like 10% at the worst on those positions). This is because I avoid the risks of short selling by using Put contracts to bet on downside for a company. That is to say that I pay a fee for the right to sell a 100 shares of GME at some price X on or before some day in the future. If the price of GME remains above price X, the party that sold me the contract keeps my money in exchange for nothing. But if the price dips low enough, I can exercise the contract and sell the GME shares for far more than they are worth on the market. For example, a $300 PUT expiring in 2 weeks was selling for around $100 on Friday. If someone bought that contract, they'd pay $100 up front and have the right to sell the shares at $300 at any time during the next 2 weeks. Today, they'd be able to buy GME shares for $95 and sell them for $300, which after the $100 premium is $105 in their pocket. That's what I am doing, and the prices of those contracts in the >6 month time frame barely budged.

The people who got crucified did something different. They sold short, which means that they paid a very small fee to borrow shares of GME (or likely synthetic versions of the same, since there are still more shares held short than exist....I don't understand that part of it) with the hope of returning those shares later. You immediately sell them and collect the price, but you still owe the shares back. You are then betting that when it comes time to return them, the share price will be much lower, such that it costs you very little to repay the lender. I.e. you borrow 100 shares of GME at $30, hoping to repay them in the future for something close to $0. The issue arises if the price goes up, since the lender wants to be sure that he's going to get paid. All he has is your promise, but generally he also wants collateral. In the case of GME, the price went from $35 (which is highly overvalued) to $381 (which is unhinged from reality). People who (correctly) bet that Gamestop is going to die soon still had to put up collateral against the potential of having to pay back the shares they had borrowed at the market rate of $381. They can post more collateral or they can just give the shares back. But the only way to get shares TO return to the lender is buying the shares off of the open market. This is a problem if more people own borrowed shares held short than real shares....some people are going to be forced to post collateral even if they cannot afford it. That produces a self-reinforcing cycle in which desperate buyers (people who are scared that the price will spiral too high for them to even be able to post collateral and thus must buy shares at nearly any price) bid the price ever higher.

Now, the overwhelming likelihood is that hedge funds did this to other hedge funds with the merry band of idiots at WSB along for the ride. However, the last thing to understand is that no entity on earth is more ill-named than the "hedge fund". They are notorious for poorly hedging, and the rules around investing in them stipulate a minimum net worth because losses are so likely....sort of the opposite of what happens in a properly hedged fund. The short sellers could've easily covered themselves by either using PUT options (what I do in order to avoid the EXACT fiasco detailed above) or by purchasing a different kind of option as a hedge. Had the short sellers sold short AND bought CALL contracts, they'd have paid a fee for the right to buy GME shares at a particular price. A call option hedge works like this: Say you borrow shares at $30 to sell short. You hope to return them when the stock is worth $5. But you know that if the price spikes, you could be ruined EVEN IF your guess proves correct. So you also purchase a Call option at $40 with the same expiration as your borrowed shares. This means that in the worst case, you have to pay $40/share to return the borrowed shares that you've already sold at $30. That's a 33% loss and it'll sting, but you'll survive. Further, if the price spikes like that it'll mean that you'll have a great opportunity to short at the peak (which people are absolutely doing right now....shorting at $380 while the price falls to $30 is about a 1250% return minus taxes and fees). So the final moral is that the only hedge funds that got wiped out are the ones that got greedy and failed to adequately hedge for tail risk (tail as in the long "Tails on a Bell curve...highly unlikely but potentially disastrous events).