The massive “gamma squeeze” in GameStop (NYSE:GME) stock that was built on short-sellers overplaying their hand is likely at an end.
The latest data from IHS Markit shows short interest in the video game retailer’s shares has tumbled to just 39%, still elevated in normal circumstances, but substantially below the nearly 140% it stood at just two weeks ago when the drama began.
All good things must end
Short-sellers got greedy. Not content to just bet against GameStop, they wanted to grind its stock down by shorting more stock than was available through the company’s float, or the amount of shares available to trade on the market.
Some traders on the WallStreetBets subreddit saw this imbalance and realized with over 2 million members from which to crowdsource a short squeeze, they could make a lot of money if they banded together and drove the price higher.
By purchasing stock and options contracts, and then not allowing their shares to be loaned out, the traders drove the price higher while preventing short-sellers from extricating themselves from their positions. The shorts lost an estimated $20 billion on their trades.
While Wall Street did nothing to stop hedge funds from overextending themselves, brokerages quickly colluded to suppress what was becoming a populist investing uprising. They banned all purchases of GameStop stock, though still allowed shares to be sold. That, of course, made them available to shorts wanting to cover.
While outrage from investors and politicians over protecting Wall Street insiders pushed the brokerages to resume trading, it was in limited amounts. Mobile trading app Robinhood allowed users to purchase only one share.
GameStop shares plummeted 30% in the aftermath, and with the short interest dramatically reduced, it seems unlikely a new rally can be sustained.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/02/02/is-the-gamestop-rally-over-short-interest-plunges/