The Lazy Economist: GME & a second short squeeze

Queen’s students discuss the future of the stock and takeaways

GME explained.

This is a two-part series on the GameStop stock short squeeze and how it unfolded in the eyes of Queen’s students. 

We last left our student investors watching the GameStop (GME) shares come tumbling down from their $500 USD peak on Jan. 28, a trend that would continue well into February. 
For many retail traders, it was time to cut their losses and sell. Aidan Yang, Eng '21, was one, suffering an 85 per cent loss when he sold for $70 USD a share one week after the squeeze peaked. 
Logan Groves, Eng '21, who had over $7 million in unrealized profit for a brief moment at the peak, continued to hold. The number of shorts was still around 27 per cent of publicly available shares, and short squeezes had been successfully pulled off on far less
Then, in the third week of February, GME prices doubled overnight on February 23 from $45 USD to $90 USD. The following week, the price climbed to over $350 USD by March 10. What was thought to be a once-in-a-lifetime financial event had happened again. 
Groves told The Journal that the significant loss in unrealized gains from the first time the stock had peaked had taken quite a toll on his mental health. He was ready to get out. Having covered his position when the stock hit the $40 range, Groves sold his remaining shares at $300, averaging a 750 per cent return on his original investment. 
Sam Alton, Eng '22, who bought in during the high $300 range in January, is the only student investor The Journal spoke with who’s still holding their position. Since it was a riskier play for him from the start, he’s decided not to sell unless it’s for a profit. 
Currently, there’s a new question: what drove the second squeeze—and are there more to come? 
The Gamma Squeeze 
During the second squeeze, it wasn’t just shorting that drove the GME price to surge—it was also thanks to call options. 
To buy a call, you pay a premium—let’s say $1—to a market maker for the right to buy a share at a set or “strike” price—say $10. If this share rises to $15, you can exercise your right to buy it for $10. You make a profit of $5 minus the premium, and the person on the other end loses $4. If it never goes above $10, you only lose your premium of $1. 
If the share price rises close to or past the strike price, market makers often buy shares to offset their own losses in case you exercise your right to buy the share. If there are enough call options, this can significantly drive up demand for the stock and, in turn, its price. 
This is what happened with GameStop. Traders took advantage of the suddenly low prices of GME to buy thousands of call options for very low premiums. Combined with the relatively high short percentages and continued devotion of retail traders to GameStop, the second squeeze was put into motion. 
While it never hit the highs of the initial squeeze, GME is still hovering around $200 USD, a 1000 per cent increase from the beginning of this year
Can we expect more GME spikes to come? While we can only speculate, Hansen Liu, Com ’22, and Nolan Breault, ArtSci ’21, agreed that another GME spike can’t be ruled out completely. Breault noted that there currently is still a high number of call options. Liu believes Wall Street may still be moving behind the scenes, based on recent portfolio decisions and bot activity on social media, among other things. 
The takeaway 
Short squeezes are nothing new, but what makes the GME short squeeze unprecedented is that it marks the first time retail traders successfully took on Wall Street, which lost a combined $15.31 billion from the start of this year. 
It doesn’t mean Wall Street’s days are numbered, but it revealed cracks in the system. 
For Brynnon Picard, CompSci '21, Robinhood’s trades restrictions acted as a reminder that “the financial system is not set up for the individual investor.” 
Moving forward, Yang passed on some advice to other retail investors: “Make your investments based on your intuition and your homework […] don’t fully trust the media [or] random people on the internet.” 
Meanwhile, Breault extended encouragement to those who have lost money. 
“Don’t let this deter you from seeking knowledge […] make sure that you are well educated and know what you are doing because it can be quite important for your financial future."

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