Written Commentary
GameStop Corp, a Texas-based seller of games and electronics, is in the midst of a battle between bullish retail traders who discuss trading ideas on social media and hedge funds that were positioned for GameStop’s stock to fall in value. Shares in the company, which operates thousands of retail stores, had drifted lower in price in recent years as a result of a consumers’ shift from physical stores and malls to online sales.
In recent weeks there has been a spectacular rise in the price of GameStop stock, as retail traders targeted short-selling funds who were betting on the stock price to drop. Legions of smaller traders bought GameStop shares, which pushed the game retailer’s stock substantially higher. In addition, retail investors bought call options, which gave them an inexpensive way to profit from rising stock prices. As a hedge, institutions that sell options typically purchase the underlying stock that is linked to the option. This provided another source of demand that pushed prices even higher.
Institutional investors were losing money on their positions that the stock would decline in price, and to limit the damage, they had to buy GameStop shares, pushing the price to even higher levels. In fact, GameStop shares have rocketed to more than 20 times the price where they were at the beginning of the year.
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