Wednesday, 3rd February, 2021

The heady rise of the GameStop share price stole the financial market focus over the past week. This rise was reportedly driven higher by a group of sharemarket enthusiasts on a social media platform Reddit who challenged hedge funds’ short positions on the stock. By driving demand higher, those short positions become increasingly expensive and risky to hold, in turn forcing the hedge fund managers to buy the stock to close out the position. Anecdotally, the trading strategy posted on Reddit started out late last year over a genuine view that GameStock was undervalued (back when it was around $5 per share), believing the size of the short position to be unjustified relative to GameStock’s financial performance (listen to NPR Planet Money podcast ‘Cant Stop Game Stop’ for a great summary of the GameStock share price debacle and a simple explanation of short positions and the idea behind triggering a ‘short squeeze’). However, it appears the trading strategy has caught on more widely and got somewhat out of hand, driving the price to astronomical levels hand - GameStop’s current share price is currently $222, evoking comparisons to the Tulip Bubble. Reddit traders have now reportedly shifted focus to silver, driving silver prices higher over the weekend. The volatility has some financial market participants nervous about the fall-out once the bubble finally bursts. Read the full report here

 

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