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GameStop: Difference between revisions
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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: | 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’m''on''. There are rational bounds to which no stock can go. Well, we know that not to be the case. | *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’m''on''. 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: | *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): | ||
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The closer to the | *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 don’t play that|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''. | ||