GameStop

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I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market Reddit. You can intimidate everybody.

—James Carville, 1993 (updated by the JC, 2021)

In which the experts in the market got properly schooled by a bunch of daytraders. Acres have been spilt on this elsewhere, but the JC’s own hot takes are these: Firstly, everyone knows shorting gives you unlimited upside risk. But there is still this basic supposition that, okay, it’s theoretically unlimited, but practically? — c’mon. There are rational bounds to which no stock can go. Well, we know that not to be the case.

Secondly, shorting a stock that is at the bottom of its range is a way more risky proposition than shorting a stock that is at the top. GameStop closed at $3.96 on 17 July last year. Imagine you have a billion dollars in cash margin and you put on a $5,000,000 short on GameStop at different prices. We have also estimated the point at which a billion dollar fund (fully into cash!) would run out of cash to post margin (this is the implied bust price):

Buy	Quantity	Peak	Margin	Implied Bust Price
$3.69	1,355,014	$469.00	$631,070,461	$701.10
$36.90	135,501	$469.00	$58,607,046	$7,011.00
$369.00	13,550	$469.00	$1,360,705	$70,110.00

The closer to the bottom the stock is, the more shares you can buy with the same investment, and the more amplified the effect is should the shares shoot up in value. Can we imagine GameStop going to 700? Suuuper unlikely; but not out of the question. Can we imagine $7,000 though, or 70,000? What would Homey say about that?

Third: There is a hard practical limit to how far any short investor can let a short position slide. This is the ugly side of the limited recourse investment vehicle. As long as you can continue to fund margin calls, you can keep your position on. That means, as long as you have cash on hand. Raising new capital wipes out your existing investors. This is the same as crystallising a loss on the position because it dilutes your existing investors into oblivion. Why? Because new investor will only buy new shares at the existing net asset value per share of the fund. Your NAV per share is close to zero. Your new investors are going to require a helluvva lot of shares.

Fourth: fully-paid for long investors do not have this natural constraint. As long as they don’t need the money they can sit indefinitely.

Fifth: The internet is a beast. You can hold out short interest against one guy — Bill Ackman’s short on Herbalife versus Carl Icahn is the signature dish of that fight — but a meme stock where everyone is blindly, stupidly, piling in because it’s cool to stick it to the man — is an unlimited supply of fresh cash against you. There is no hard practical limit here.

Sixth: The Robinhood doctrine: parts of the market infrastructure can tip the scales. AOC was right: Robinhood strangled long interest, while institutional short players were unrestricted (barring the short-tick requirement, which meant they couldn't 't short on a down-tick).