The Stock Market, Investments, and Investing Thread
(03-11-2021, 02:52 AM)churros Wrote: Question about the mechanics of this hypothetical squeeze. Somebody has to be around to buy your stock right? So who is going to keep buying after it has already mooned? Let's say it hits $1000 – do you still need liquidity to make the sale and if so who's going to buy the top?

Long explanation:

At a basic level, you might already know this, you sell a single share short. You're borrowing money from your broker at interest to "rent" a share you don't own so you can sell it, and you have an effective credit limit. If the stock goes down, you're fine. If the stock goes up, the value of your account falls, and if it tanks below the "maintenance requirement" (the credit limit), the broker will first notify you that you're in trouble and need to deposit more money or make some trades to settle up (known as a "margin call"). You also pay interest on the amount you owe, not the amount you borrowed, so as your position gets worse, the interest charges do, too, which can further draw down your account and accelerate the margin call.

If you don't/can't satisfy your margin obligation, they execute the cover - your corresponding purchase to settle your balance - against your will, to protect their loan. You lose, and if it happened too fast, you could easily owe the broker money.

Now imagine you're a big player doing this with many millions of dollars. The plan here was to mug the hedge funds. Back them into an alley, stab them, and take their wallets. Their short positions were so large that they'd lose so much money so fast that they'd have no choice but to buy the shares Redditors owned at an insane price to stop the bleeding.

To a large extent, this did happen, Melvin's losses were in the billions. It's their own fault. The idea of a hedge fund is to "hedge" by setting up countervailing positions so that you won't suffer unchecked losses like this. The hedge funds assumed Gamestop would quietly go to zero over a period of years and they'd never have to pay the loans back, r/WSB correctly identified the vulnerability and crashed a truck through it.

However, what most likely happened is that as the price skyrocketed, some funds set up brand new short positions at astronomical entry points of $300+, and were able to recover some of their money by buying it back when it tanked back to $50. In part, this is the significance of Citadel lending Melvin nearly three billion dollars at the peak of the crisis: both a lifeline to try to mitigate the damage by avoiding trading at a loss, and also probably to try to enter new positions to hedge against what was happening.

Pavlov\s dog datelin[hr' Wrote: e='1615443251']Yeah unfortunately the short interest in GME is much lower than it was, if you believe the people reporting that number. I personally think the vast majority of short positions have been closed and we're seeing renewed interest in GME due to the hype. I really doubt it's going to 1k.

Yes. I think what we're actually witnessing here is how the market looks without efficient shorting. $250 is an obviously attractive short entry point, but not if you're in fear that psychotic ape cultists are going to randomly blow out your margin when you walk away to make a sandwich. This is like a hostage situation.

Very interested to find out what happened on that $350-to-$170 rocket sled into the ditch, though. The order book was so thin, could easily see a massive short play that paid off instantly and was mostly covered during the ride back up to $280. Somebody could have easily bought their yacht on that alone if they knew what they were doing.

A lot of young guys are learning things about the stock market right now that a lot of professionals get through a career without witnessing. I've been doing this as a hobby for almost 20 years and I found out all kinds of things I didn't know about margin requirements, options, etc.
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RE: The Stock Market, Investments, and Investing Thread - by Jetset - 03-11-2021, 02:26 PM

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