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{{a|disaster|{{image|disaster cafe|jpg}}{{image|GME|png | {{a|disaster|{{image|disaster cafe|jpg|Would you like some hubris with that, Mr Plotkin?}}{{image|GME|png|Ouch ouch ouch}}}}{{d|Bottom of the range|/ˈbɒtəm ɒv ðə reɪnʤ/|n}}All other things being equal, a dangerous place to play. We have looked elsewhere at the travails of [[Melvin Capital Management LP]] when it tried to short [[GameStop]], but this points to a general proposition: if your strategy involves prices staying low, or going lower, your arse is hanging out if you invest at the “bottom of the range” of plausible prices. | ||
===[[GameStop]] and the [[outsider trading|outsider traders]]=== | ===[[GameStop]] and the [[outsider trading|outsider traders]]=== | ||
An equity cannot have a negative value — not even one as ropey as [[GME]] — so there is a natural limit to how much you can make by shorting it: your purchase price. The lower that price, the less, in absolute dollars, you can make by shorting a single share (but the more shares you can afford to buy!!!). This is where the significance of the range comes in: if the stock is already low against its historical range, and low in absolute terms — as, by 2019, was [[GME]] — there is only so much further it can go: if Melvin put on its short at $1.00, it stood to gain at most $1 per share. But it is hardly outlandish to suppose a stock could return to points ''higher'' in its range: after all, it has been there before. The stock might ''seem'' in terminal decline, but look: things can change. Even without the mendacious activities of the Reddit [[outside trading|outside traders]], it wasn’t crazy that GME could go back to $15.00 per share. Even this kind of move would be crippling: Unlike a “long” position, a [[short sale]] ''requires'' you to borrow — not a fixed amount of cash, but ''the prevailing value of security you are shorting''. Since you don’t ''have'' that stock — you sold it short — if it rises, so will your [[margin]] obligation to your broker. You will have to fund that in cash. So a $1m investment in GME — promising a maximum $1m return — would require $15m of margin, if the stock rallied ''even to historical levels''. This is scary gearing for an uncertain future. | An equity cannot have a negative value — not even one as ropey as [[GME]] — so there is a natural limit to how much you can make by shorting it: your purchase price. The lower that price, the less, in absolute dollars, you can make by shorting a single share (but the more shares you can afford to buy!!!). This is where the significance of the range comes in: if the stock is already low against its historical range, and low in absolute terms — as, by 2019, was [[GME]] — there is only so much further it can go: if Melvin put on its short at $1.00, it stood to gain at most $1 per share. But it is hardly outlandish to suppose a stock could return to points ''higher'' in its range: after all, it has been there before. The stock might ''seem'' in terminal decline, but look: things can change. Even without the mendacious activities of the Reddit [[outside trading|outside traders]], it wasn’t crazy that GME could go back to $15.00 per share. Even this kind of move would be crippling: Unlike a “long” position, a [[short sale]] ''requires'' you to borrow — not a fixed amount of cash, but ''the prevailing value of security you are shorting''. Since you don’t ''have'' that stock — you sold it short — if it rises, so will your [[margin]] obligation to your broker. You will have to fund that in cash. So a $1m investment in GME — promising a maximum $1m return — would require $15m of margin, if the stock rallied ''even to historical levels''. This is scary gearing for an uncertain future. | ||