We’ve talked and heard nonstop about the GameStop short squeeze happening right now, and for good reason. It has turned the market upside down this week and caused quite the stir among Robinhood traders. But enough is enough.
That’s why WealthPress Head Trader Roger Scott and I sat down to clear up the reality behind the GameStop Corp. (NYSE: GME) news. We also talked about how to move on from it and what our favorite sectors are right now.
Back in December, I sent out an email discussing how the sausage was made when it comes to IPOs.
Now, with all of this talk surrounding the GameStop short squeeze, we need to clear up how they work.
Many people are looking at this as a “people vs. Wall Street” situation. And that may be the case at the end, as people follow the trend. But initially… There’s no way it was solely done by retail investors.
Clearing Up the GameStop Short Squeeze
Shorting stocks is a process where traders can profit from a stock’s price going down. To do this, the trader borrows shares of the stock from their broker and then sells the shares on the stock market. The trader gets cash for selling the shares, but now owes shares to their broker.
The hope is that the stock’s price will fall, and then the trader can use the cash they made selling the shares to buy back the same number of shares at a much lower price. Then the trader returns the shares back to the broker and keeps the difference — turning a profit.
In this case, the GameStop short squeeze followed an options blowup.
In order to make this happen, it would require some shrewd people that know the market to buy some out-of-the-money calls. They would have to do so in massive size, sweeping every call in every month available to them.
I’m sorry, but there’s no way your average “retail army” could pull this off. No matter how coordinated they were.
The Reddit “degenerates” and the retail investors were definitely involved, but there’s no way they did this alone.
We’re not saying this isn’t a huge movement or that it isn’t newsworthy, but it may not be what you think. My only caution is to not follow the trend too late and get left holding the bag.
If you want to know more details on the GameStop short squeeze and our viewpoint on it, as well as which sectors we’re favoring, check out our video below.
P.S. Check out Alpha Trades Head Strategist Adam Sarhan’s short video on the real reason why brokers like Robinhood, TD Ameritrade, Charles Schwab and others are restricting or outright banning new trades on GameStop, AMC, BlackBerry, American Airlines, Bed Bath & Beyond, Nokia and others.
Did you lose money or miss out on any big wins because of the restrictions? Are you considering changing brokers now? Share your thoughts on the ongoing short squeeze mania with us at firstname.lastname@example.org, and we could feature your story in an upcoming piece.