News about the stock market rarely crosses over into the cultural mainstream, and historically when that’s happened, it’s meant some catastrophic financial event has taken place. (See: The housing and stock market crashes of 2008.)
But the stock market was the single biggest news story Wednesday, financial or otherwise, due to a group of Reddit shitlords pumping up a collection of stocks and pushing some billion-dollar financial institutions to the brink of bankruptcy.
Hedge fund Melvin Capital needed a $2.75 billion bailout on Monday after the stock price for GameStop, the video game retailer, spiked to more than $70 a share over the weekend. Just a month earlier, the stock was hovering near $15. Melvin was shorting the stock, hence the need for a bailout. Reports of Melvin Capital’s financial struggles sent GameStop’s share price soaring even higher, though, to more than $100 a share on Monday, putting the hedge fund in an even more precarious financial decision. As of this writing, the stock was trading for $330 per share—77 times higher than its share price of $4.28 a year ago.
The GameStop stock rally is the handiwork of r/WallStreetBets, a Reddit community where people share news, memes and personal anecdotes about playing the stock market. Here’s how the WallStreetBets group came to power, and how they’re wielding their collective capacity to troll the stock market—and make millions of dollars doing it.
you might be having a bad day, but at least you’re not some hot shot wall street suit that has to tell his boss they lost billions because of some meme bros on reddit
— MJ (@morganisawizard) January 27, 2021
How WallStreetBets became a major market force.
WallStreetBets started as a haven for retail bros, 20- and 30-something amateur traders who try to strike it big making short-term options bets on the stock market. But during the pandemic the group has grown into a legitimate financial force, with the power to manipulate markets and topple institutional investment outfits.
Activity in the group has exploded during the pandemic, presumably because people started day-trading stocks to pass the time while at home. The subreddit grew from 450,000 members in January 2019 to 774,000 members in January 2020, a 72 percent increase, according to Subreddit Stats. WallStreetBets has added nearly 1.3 million new members since then, however, a nearly 200 percent increase year-over-year.
The “Granddaddy” of the GameStop Surge
The plan to pump GameStop actually goes all the way back to September 2019, when WSB member DeepFuckingValue posted about making call options for GME (GameStop’s ticker symbol) for January 2021. DFV is the “granddaddy” of the GME stock surge, according to Shiv Abrol, an analyst at Roystone Capital who uses WSB as part of his professional due diligence.
A call option is a contract that gives the owner the right, but not the obligation, to buy a stock at a future date, at a predetermined price. (Options are popular because you’re not left holding the bag if the market goes against you.)
In this case, DFV bought in 2019 the right to buy GameStop stock on January 15, 2021, at $8 a share. If the stock price is below $8 by the expiration date, the options are worthless. If the stock price is above that $8 threshold, however, the options are in the money, meaning they have intrinsic value.
me before and after investing in gamestop pic.twitter.com/g5iDP5qklp
— derek guy (@dieworkwear) January 27, 2021
And boy, did those options end up having value. DFV became increasingly convinced of his GME bet as the months wore on, buying even more GME call options at various strike prices and expiration dates throughout 2020 and 2021. He never wavered, even as his options fluctuated wildly in value. On one day in July, he lost more than $10 million in value. Still, he kept buying new GME puts. DFV was going “YOLO,” the WSB term for doubling down, again and again, on a single, potentially life-changing longshot stock bet.
DFV would be rewarded, handsomely, for his faith. By August 2020, his contracts were worth $600,000. In September, he crested $1 million. Mid-October, $2.3 million. He entered 2021 with more than $3.1 million in GME contracts, and then shit got really crazy. As DFV’s legend grew, more people on WSB got in on the action, pushing the GME price higher and higher. As of his latest update, DFV’s E-Trade account is worth $22.8 million, $4.4 million of which is in cash he pulled out. And it all started with $53,000 in options premiums.
Squeezing the short-sellers
While this is great for DFV and the other WSB members who have made tens or hundreds of thousands of dollars riding the GME wave, it’s been hell for Melvin Capital.
Melvin had $55 million worth of put options on GameStop, which are the opposite of calls. Puts assume the share price of a stock will go down and give their owners the option to sell a stock at a certain price. Melvin assumed GameStop’s stock would fall, and bought puts allowing Melvin to sell GameStop’s stocks above the market price, netting Melvin a profit. The stock obviously went up, instead, rendering those put options worthless.
The real problem for Melvin is that it was also shorting GameStop, meaning it was borrowing shares of GameStop, selling them on the market and using those proceeds to make other investments. Problem is, Melvin eventually has to return those GameStop shares. So now Melvin has to buy GameStop at their new, inflated price, only to give those shares back to the original owner.
It’s not illegal, per se
On its face, the GameStop surge appears to be a classic pump-and-dump scheme, in which a group of people collude to hype up a stock, artificially increase its share price and then sell at a profit.
There have been talks about the Securities Exchange Commission coming down on WallStreetBets and other online stock forums, but the tricky part is there is no evidence of fraud or insider trading. All of this information is being exchanged in the open, on a public forum. There’s no law against a group of investors taking the same position in a stock, even if they’re doing it as a massive troll.
It’s about more than making money
Sure, the dudes on WSB want to make money. Who doesn’t? But them putting the collective squeeze on Wall Street is about more than making a buck. It’s about wreaking a little havoc on an enormous public stage.
You can see this manifest in the stocks WSB chooses to pump. BlackBerry, BlockBuster and GameStop are all relics of the millennial era, and all of those companies are experiencing WSB-induced surges in stock prices.
It’s easy to dismiss this behavior as trolling, which it is to a large extent. But there’s a philosophical element to it. WSB isn’t trying to harm ordinary people—it’s attempting to stick it to the financial establishment that orchestrated the 2008 financial collapse, and prove that the stock market often has no connection to reality.
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