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Shares in GameStop, a Texas-based video game retailer, started rising on Jan. 11, and now the company's market value is higher than American Airlines Group Inc., Under Armour Inc., and other large companies. By end of trading Tuesday, GameStop was worth more than $10 billion, up from $1.2 billion at the beginning of the year. The most recent jump in market valuation was fueled by a tweet Tuesday from Elon Musk, but the engine driving GameStop's bizarre reversal of fortune is individual day traders who frequent Reddit's WallStreetBets forum.
These "ordinary investors, stuck at home in the pandemic," swap tips and hatch trading strategies at WallStreetBets and other forums, "often buying things Wall Street has bet against," The Wall Street Journal reports. "Many tout their long-shot wagers with the expression 'YOLO.'" GameStop is by far the biggest manifestation of this phenomenon, but the small investors have also pushed up the valuations of BlackBerry, AMC, and Chinese electric car company NIO.
"The scale and pace of the rally in GameStop, BlackBerry, and other shares this year have caught Wall Street by surprise," the Journal says. And hedge funds that had shorted, or bet against, GameStop in particular have lost billions. Melvin Capital, a hedge fund run by Gabe Plotkin, got a $2.75 billion emergency infusion after its short bets on GameStop and other stocks drained 30 percent of its value this year, Bloomberg News reports.
Melvin Capital threw in the towel late Tuesday and abandoned GameStop at a steep loss, CNBC's Andrew Ross Sorkin reported Wednesday morning.
— Squawk Box (@SquawkCNBC) January 27, 2021
Most of the WallStreetBets traders buy call options, not shares of companies, allowing them to make fairly large bets with small investments, the Journal explains. When small investors buy call options in large numbers, as they have with GameStop, the firms selling the options typically hedge by making a separate trade, in this case often buying GameStop shares.
"In extreme cases, this can become a self-reinforcing mechanism, with day traders buying more calls and driving the market makers to buy shares, lifting the stock's price and encouraging more traders to jump in on the action," the Journal explains. But this "momentum trading" is risky, and industry veterans foresee the rally crashing under the weight of market fundamentals. Read more about how the WallStreetBets phenomenon works at The Wall Street Journal.
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