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Volumes in GameStop Corp [NYSE:GME] have gone through the roof in the last few trading sessions on the NYSE: shares started trading at a higher rate on Friday, but since than the GameStop stock price has jumped from around the 40 mark to hit a high yesterday of 144.

GameStop is the most heavily shorted stock in the US market – 138% of its shares sold short – and now hedge funds and other short traders are desperately trying to cover their shorts, hence the sudden rise in activity.

Telsey Advisory Group downgraded its rating for the stock from outperform to underperform yesterday. But there has been a sudden surge of optimism in GameStop as Chewy Inc CEO Ryan Cohen has joined the board and there is speculation now that the company – a moribund mall retailer –  could see a strategic change in direction. But the stock is already up over 2900% in one year.

“The sudden, sharp surge in GameStop’s share price and valuation likely has been fuelled by a short squeeze, given the high short interest, and, to a lesser degree, speculation by retail investors,” Telsey Advisory Group said. “We believe the current share price and valuation levels are not sustainable.”

GameStop stock closed yesterday in the US market at 76.79 but were still up over 18% on the day.


GameStop is the target of a coordinated raid on short money

There is now increasing speculation that the rise in the share price is part of a coordinated short squeeze by retail traders, buying large volumes of out of the money call options. GameStop was targeted because of the large numbers of hedge funds with short interest in the stock. Because of the thin liquidity in GameStop stock, brokers servicing call options have been forced to buy in the open market to hedge their exposure.

Brokers have been buying more yesterday as the original call options from Friday approached strike price. At the same time short sellers have been closing their positions to try to avoid losses, buying back shares on the open market. Pre-US market trading on Tuesday is indicating that there is going to be further tactical buying when the US session opens lunchtime today UK time.

The share price activity does seem to have been the consequence of a coordinated raid by a large body of private traders who have enough muscle in the market to play havoc with the pros’ short positions. While traditionally retail investors have been seen by hedge funds as ‘behind the curve’, in the case of GameStop they seem to be calling the tune.

Pre-market activity and additional data are pointing to more excitement

Based on pre-market activity it does look as though the retail community has more than one US hedge fund or broker over a barrel on this one. From the perspective of the medium to long term investor, however, it is probably going to be too volatile a trading session on GameStop today. Data accessed by The Armchair Trader also bears this out with large interest in the stock among UK-based traders this morning as well as they wake up to the short term opportunity offered.

Some journalists are now calling this ‘the boredom markets hypothesis’ – traders who 10 years ago were going on raids in World of Warcraft are now coordinating their options trading activities to go  on raids against hedge funds. They are locked up at home and have time to spend on coordinating their activities. Or this could just be the shape of things to come as a new generation of retail traders makes its presence felt.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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