Game Stop Short Squeeze Explained

We explain how GameStop stock moved over thousands of percentages and Robinhood failed. It all comes down to a little thing called a short squeeze and a gamma squeeze. With these two things happening in sync, it’s like pouring gasoline on a fire.

GameStop Stock Background

To understand whats really happening with GameStop stock movement and the huge failure by Robinhood, we need to take a look at what the overall context of the market was coming into this move. Let’s take a trip down memory lane:

GameStop’s business model is based on retail customers coming into a physical location and buying and selling games. With the rise in online gaming, now customers can buy games directly from their consoles game store. There is no longer a need to go to a physical location, especially given the current circumstances in the world. This business model is no longer profitable and sets up Game Stop to slowly fall out of existence.

We can not forget however that GameStop stock is still listed on the NYSE (New York Stock Exchange). Because of this, the people on Wall Street have to make a decision. Do they just let the stock go down and avoid it? Or do they step in and try to make money as the stock goes down by shorting it? Well, based on a failed business model, and the fact that the weekly technical stock chart was trending lower, it made sense to short GameStop stock. It made so much sense that the short float on GME (game stop stock ticker from here on out) was over 200%! Now remember that to be short a stock, we need to have someone who has SOLD borrowed shares first and needs to BUY those shares back to close the position.

GameStop Goes Viral on Reddit’s Wall Street Bets

As investors and traders from the reddit thread wall street bets started to get active in GME, many started posting some decent fundamental analysis that pointed to the stock being able to move higher. They had gamestop stock price predictions that went far beyond the $10 mark. Because they were buyers, supply and demand rules stated that the share price needed to reflect the new found demand for the shares. Price started to increase which caused people who were short GME to have to BUY to cover their positions. This chain reaction is known as a short squeeze and the biggest loser was the capital management company named Melvin Capital.

Options Gamma Squeeze Adds Fuel To The Fire

But to add fuel to the fire, we also saw a gamma squeeze. This is the idea that when an option is purchased, it causes the market maker (person who wrote the option) to take on negative delta in the case of selling call options. In order to neutralize that delta, the market maker now needs to buy shares of the underlying asset, in this case GME stock. Because we had a significant amount of call options being traded this again poured gasoline on the fire by introducing more buyers to the situation. At the end of the day, this caused the most recent move that was parabolic in GME.

Robinhood’s Involvement With GME

So why did Robinhood not allow you to trade these types of stocks on Thursday? Well quite simply, Robinhood makes its money by selling your market data to market makers. Their number one customer is Citadel. Citadel takes that information and can place orders before or after yours to make fractions of pennies in what is known as arbitrage. So what does this have to do with not being able to trade GME or AMC or BB? Well, Citadel has a large investment into what capital management firm? None other than Melvin Capital. So as the phones start ringing, and Melvin starts taking a hit, Robinhood protects their largest customer by preventing you (its product) from forcing GME stock price any higher.

Moving Forward

Moving forward we all need to take a step back and think about personal responsibility. At the end of the day, everyone is in the market to make money. But to make money there must be some form of risk. YOU are responsible for knowing YOUR risk. The situation is slightly different for those trading on margin, where the broker does have a responsibility to step in to save their own funds.

Go with a broker who supports your best interests. If you are set on going with a commission free broker, use this link to get four free stocks on WeBull: Get 4 Free Stocks! We can also avoid trading risky products. Trade things that react reliably to price action, patterns, technical analysis, and aren’t halted every five minutes. We do an analysis of companies just like this every Sunday. If you aren’t familiar with them, tune in and see how you like it! Maybe this is your new bread and butter strategy.

Whatever you do, keep trading, and stay green.