Here’s my best model of the current GameStop situation, after nerding out about it for two hours with smart friends. If you’re enjoying the story as a class warfare morality play you can skip this, since I’ll mostly be talking finance. I may all look really dumb or really insightful in the next few days, but this is a puzzle I wanted to figure out. I’m making this public so posterity can judge my epistemic rationality skillz — I don’t have a real financial stake either way.
Summary: The longs are playing the short game, the shorts are playing the long game.
At $300, GameStop is worth about $21B. A month ago it was worth $1B, so there’s $20B at stake between the long-holders and short sellers.
Who’s long right now? Some combination of WSBers on a mission, FOMOists looking for a quick buck, and institutional money (i.e., other hedge funds). The WSBers don’t know fear, only rage and loss aversion. A YOLOer who bought at $200 will never sell at $190, only at $1 or the moon. FOMOists will panic but they’re probably a majority and today’s move shook them off. The hedgies care more about risk, they may hedge with put options or trust that they’ll dump the stock faster than the retail traders if the line breaks.
The interesting question is who’s short. Shorts can probably expect to need a margin equal to ~twice the current share price, so anyone who shorted too early or for 50% of their bankroll (like Melvin and Citron) got squeezed out already. But if you shorted at $200 and for 2% of your bankroll you can hold for a long time. The current borrowing fee is 31% APR, or just 0.1% a day. I think most of the shorts are in the latter category, here’s why:
Short interest has stayed at 71M shares even as this week saw more than 500M shares change hands. I think this means that new shorts are happy to take the places of older shorts who cash out, they’re only constrained by the fact that ~71M are all that’s available to borrow. Naked shorts aren’t really a thing, forget about that. So everyone short $GME now is short because they want to be, if they wanted to get out they could. In a normal short squeeze the available float is constrained, but this hasn’t really happened with $GME.
WSBers can hold the line but can’t push higher without new money that would take some of these 71M shares out of borrowing circulation or who will push the price up so fast the shorts will get margin-called or panic. For the longs to win, they probably need something dramatic to happen soon.
One dramatic thing that could happen is that people who sold the huge amount of call options expiring Friday aren’t already hedged and will need to buy shares to deliver. It’s unclear if that’s realistic, most option sellers are market makers who don’t stay exposed for long. I don’t think there were options sold above the current price of $320, so there’s no gamma left to squeeze.
I think $GME getting taken off retail brokerages really hurt the WSBers. It didn’t cause panic, but it slowed the momentum they so dearly needed and scared away FOMOists. By the way, I don’t think brokers did it to screw with the small people, they’re their clients after all. It just became too expensive for brokerages to make the trade because they need to post clearing collateral for two days. They were dumb not to anticipate this, but I don’t think they were bribed by Citadel or anything.
For the shorts to win they just need to wait it out not get over-greedy. Eventually the longs will either get bored or turn on each other — with no squeeze this becomes just a pyramid scheme. If the shorts aren’t knocked out tomorrow morning by a huge flood of FOMO retail buys, I think they’ll win over the next weeks.
Here’s my best model of the current GameStop situation, after nerding out about it for two hours with smart friends. If you’re enjoying the story as a class warfare morality play you can skip this, since I’ll mostly be talking finance. I may all look really dumb or really insightful in the next few days, but this is a puzzle I wanted to figure out. I’m making this public so posterity can judge my epistemic rationality skillz — I don’t have a real financial stake either way.
Summary: The longs are playing the short game, the shorts are playing the long game.
At $300, GameStop is worth about $21B. A month ago it was worth $1B, so there’s $20B at stake between the long-holders and short sellers.
Who’s long right now? Some combination of WSBers on a mission, FOMOists looking for a quick buck, and institutional money (i.e., other hedge funds). The WSBers don’t know fear, only rage and loss aversion. A YOLOer who bought at $200 will never sell at $190, only at $1 or the moon. FOMOists will panic but they’re probably a majority and today’s move shook them off. The hedgies care more about risk, they may hedge with put options or trust that they’ll dump the stock faster than the retail traders if the line breaks.
The interesting question is who’s short. Shorts can probably expect to need a margin equal to ~twice the current share price, so anyone who shorted too early or for 50% of their bankroll (like Melvin and Citron) got squeezed out already. But if you shorted at $200 and for 2% of your bankroll you can hold for a long time. The current borrowing fee is 31% APR, or just 0.1% a day. I think most of the shorts are in the latter category, here’s why:
Short interest has stayed at 71M shares even as this week saw more than 500M shares change hands. I think this means that new shorts are happy to take the places of older shorts who cash out, they’re only constrained by the fact that ~71M are all that’s available to borrow. Naked shorts aren’t really a thing, forget about that. So everyone short $GME now is short because they want to be, if they wanted to get out they could. In a normal short squeeze the available float is constrained, but this hasn’t really happened with $GME.
WSBers can hold the line but can’t push higher without new money that would take some of these 71M shares out of borrowing circulation or who will push the price up so fast the shorts will get margin-called or panic. For the longs to win, they probably need something dramatic to happen soon.
One dramatic thing that could happen is that people who sold the huge amount of call options expiring Friday aren’t already hedged and will need to buy shares to deliver. It’s unclear if that’s realistic, most option sellers are market makers who don’t stay exposed for long. I don’t think there were options sold above the current price of $320, so there’s no gamma left to squeeze.
I think $GME getting taken off retail brokerages really hurt the WSBers. It didn’t cause panic, but it slowed the momentum they so dearly needed and scared away FOMOists. By the way, I don’t think brokers did it to screw with the small people, they’re their clients after all. It just became too expensive for brokerages to make the trade because they need to post clearing collateral for two days. They were dumb not to anticipate this, but I don’t think they were bribed by Citadel or anything.
For the shorts to win they just need to wait it out not get over-greedy. Eventually the longs will either get bored or turn on each other — with no squeeze this becomes just a pyramid scheme. If the shorts aren’t knocked out tomorrow morning by a huge flood of FOMO retail buys, I think they’ll win over the next weeks.