The Indicator from Planet Money - GameStop and the Short Squeeze

The price of GameStop shares have surged this week, in part because of something called a short squeeze.

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This is the indicator from Planet Money. I'm Stacey Vanek Smith for the last couple of weeks. We've all been watching open mind. That's the price of certain stocks has been performing. Very strangely. This is true. Okay. So for example last week stock issued by the video game retailer GameStop win from around $40 a share just it just has gone crazy. Okay, I will check is changing stove up to the second updates as of 12:28 p.m. Wednesday.

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$348.46 a share Rising by the second and here is maybe the weirdest thing about all this. This is all happening after a research analyst said last week that the shares of GameStop were only worth about $20 a piece. In other words that it was over valued at $40 a share and this has not been a smooth pop right now dog has been up and down and up and dying and no one is really sure what's going on or who's behind it. Everyone's pointing the finger at everyone else if the banks hit the algorithm it's the day Traders, but there is one group that keeps coming up for blame short sellers or more specifically something that can happen to short Sellers from time to time something known as the short squeeze.

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The short squeeze this is a Wall Street term. We're going to explain a short squeeze to you using the Planet Money mascot the squirrel squirrel. Trust me on this squirrel Journey ride the squirrel train the long tail.

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Okay, Stacy so want you to imagine that we are squirrel. Okay. Okay. I'm going to are you being a very responsible squirrel have been squirreling away loads of nuts for the winter. Now I have to but I've also been keeping an eye on the weather and I'm pretty convinced that there's going to be a nut surpluses winter is going to be a lot of nuts on the market. This would be the squirrel not Market precisely K-O-K nodal the other squirrels are as responsible as you and me a lot of them leave it to the last minute to stock up and you end up with these shortages and consequently these very long lines at the nuthouse. I think we're definitely already there. I think there are long lines at the Death House bad this year right for whatever reason and that means I think the prices are going to fall and I want to bet on that price movements, which means if I want to short the market that you were going to bet against the market for nuts as a squirrel.

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That literally sounds not to me. So right now I mixed fancy. Unsalted nuts are ten bucks a pound of choice fancy. Unsalted nuts. Okay. I might think the price of that of that collection of nuts is going to go lower. And so it's a setup my short. The first thing that I do is go to someone who's got a load of nuts and is willing to lend me a pint or two about person is it you were wanting to borrow my nuts that I saved a little fee to sweeten things. I'll give you an acorn.

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Alright, okay. I'm in I'm in so let's just start with a one-time bags to sell it for $10. Right which leaves me with a nice crisp $10 note and then we wait for a day or two and we wait.

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Oh and look at that. The price has fallen. Solenoid $8 a pint. Okay, so you sold a pound of nuts for ten bucks. And now they're worth 8 bucks would buy them for $8. And of course, that means I get some change for my $10 note $2 of my own which I get to keep so that is a successful shorts what happens if the price goes in the other direction, let's say you are wrong about the value of nuts this winter. Maybe there's a supply shortage the price of nuts goes through the roof and suddenly like Lucy all the sudden. It's like $12 for a pound of nuts to $12 and I'm out of luck by cuz I have to go to get those nuts back to get them back to you. So I go to dig in my own pocket, but there was $2 to make $12 to get your notes back. That means I'm going to take a loss of $2 loss.

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Who's at the whim of supply and demand is not the law of supply and demand that drives the market. I mean take this company GameStop, right? This is a company that has a bunch of brick-and-mortar stores that sell video and computer games. Like a lot of other retailers are right now, which is probably why you know analysts have been a little skeptical about the price of its stock supply and demand was what drove that price up. What happened was you had a bunch of people who got together and chat rooms. And these are like skip a day Traders not the traditional Short Selling squirrel another group know where or even the regular trading so we don't know who these people are mean. They hang out in chat rooms and they call themselves things like smells pants and protein molecular. I mean, we don't know who they were. They could be Chipmunks for all we know.

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Recently there. There was one of the traitors and you can kind of rely on what they're doing and why they're trying to anticipate the prices of stocks and other things going up and down and then you had this other group and we're not sure who they are or like what they want to think of more than one to make money. Right? And I think a lot of them want to put the screws to short sellers short-sellers bedding for some time that GameStop stock will drop the most populous thing happening here with a lot of these traitors judging by the Reddit threads are they just want to poke a middle finger at Wall Street that. The first and then of course is all these other people who just training for kicks, right? I mean that they see the price of the stocks go up and in many cases they want to be part of that since some of them even want to buy at the high-tech. They want those bragging rights. And what they do is to start this kind of friends if they spread rumors and news chat rooms. I get all fired up and then they wait till the stock pumps and then there were lots of chasing it upwards and onwards and upwards which brings us to

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Short squeeze guess the short squeeze. What is the short squeeze? It means trouble for short sellers like me because we remember have to buy back the stock with a nut. So whatever it is that we sold in order to return them to the people who let them to us to you. Right then we start to see prices going up and up and up frankly we start to panic because you are going further and further into the red exactly. Right? So now I wear a little rushing into the market to buy a stalker on. So whatever before the price gets too high and wipes us ice and we're all doing it at the same time, which of course drives the price even higher all these people buying you're literally being squeezed you are literally being squeezed. I mean imagine this like a hole in a tree trunk and you got like a hundred Short Selling squirrels or Russian to get through the whole pill at the same time while the whole is getting smaller bloodbath happening with those stocks this month.

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What is the Chipmunks they're in there. They're doing things very very differently to the rest of us. They're pumping the stalk and they're having a good old laugh about it. Sad when the price falls back.

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Sherman that they're going to lose some money but but not as much as you might think because many of them would have bought the stock itself, right what that has done is all about the option to buy the stock later and I don't listen to buy that's cool too cold cost a fraction of what the stock itself costs nothing about these these options as there's no obligation to buy write the problem. Is that the set the person who sells you that option which is usually a bank has to go in and buy the store. Anyway, just in case you decide that you do want to buy the shares because the banks are buying that's driving the stocks up as well.

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It's right there Patty, but we should bring everything the Chipmunks because you know, it will ease the tragedy of the forest.

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This episode of the indicator was produced by Dave Blanchard was fact-checked by Samsung by the indicator is a production of NPR.

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