Short sellers lose more than $600 million

Dusseldorf Shares in video game retailer Gamestop and cinema operator AMC are currently making a comeback on Wall Street. Gamestop shares are up more than 50 percent over the past six trading days, while AMC shares are up more than 30 percent. Gamestop was up 30 percent on Tuesday alone. AMC paper gained a good 15 percent.

Both stocks were among the most discussed stocks last year on the Wallstreetbets sub-forum on the Reddit platform, which is popular with private investors. Interest is currently growing again, as data from the analysis company Swaggystocks show. Accordingly, Gamestop was by far the most discussed stock on Tuesday.

However, other former Wall Street bets favorites such as Koss and Bed Bath & Beyond (BBBY) are also benefiting from the current rally of Gamestop and AMC. Shares in headphone maker Koss rose nearly 30 percent on Wednesday. Stocks in retailer BBBY were up 2 percent.

Bad news is the massive price gains in Reddit stocks for short sellers betting on falling prices there. At Gamestop alone, short sellers made book losses of 366 million dollars. At AMC it was 240 million. Total losses are well over $600 million.

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As a result, their book profits from the correction have shrunk by 40 percent within one day since the beginning of the year, according to the analysis company S3. At Gamestop, profits fell to $154 million, at AMC to $838 million. At the beginning of March, it was still 318 million and 1.01 billion dollars.

Gamestop rally reminder

This movement brings back memories of the past year. At that time, hedge funds had massively bet on falling prices for Reddit shares because the business model of companies like Gamestop and AMC was under pressure from the corona pandemic. Private investors organized in the Reddit sub-forum Wallstreetbets then tried to force the short sellers out of the market through concerted purchases.

>> Read about this: A year after the Gamestop rally: What’s left of Reddit traders.

The background was that short sellers bet on falling prices via so-called short sales. They borrow shares and sell them immediately, hoping to be able to buy them back at a lower price before the return date. The difference between the sell price and the buy price is the profit.

However, if the stock rises, the short sellers face losses. If they want to limit this and stop their bets (covering), they have to buy back the shares into the rising market and thus continue to drive the price. This can trigger a price spiral with further covering purchases – a so-called short squeeze.

At Gamestop and AMC, a combination of excessive buying by professionals and individual investors and covering purchases have catapulted prices higher over the past year. The Gamestop course rose by almost 2000 percent from the beginning of January to mid-March. At AMC it was $620.

A repetition of a similar dimension currently seems unlikely because the number of shorted stocks is smaller. According to S3, up to 140 percent of freely tradable Gamestop shares were shorted last year, and the current figure is 20 percent. However, the likelihood of a smaller-scale short squeeze has increased, says S3 analyst Ihor Dusaniwsky.

More: “Gray swans”: Investors should pay attention to these five risks.

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