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12 Comments

WallStreetBets 101

A fun thing happened because the internet.

Essentially this is what happened:

  1. This subreddit synchronized stock trades on the video game retailer GameStop.
  2. Wall Street hedge funds that had “shorted” the stock (bet that the value would go down instead of up) get destroyed.
  3. People lose their minds (get really excited about this), hilarity ensues.

This is not a small thing and the larger picture is very, very complex but I believe that this event is certainly not inconsequential. But, here’s your high-level:

The difference between investing in a stock with the hopes that it goes up is that there is a “cap” or ceiling to how much you can make and lose based on your initial investment — if you believe a $10 stock will rise and you buy 1 share at that price and it goes to $20, you’ve just made $10 (pre-tax, pre-fees). And, if this doesn’t work out and the stock goes to $0, then, you’ll lose $10. Basic risk / reward.

When you “short” a stock, you effectively borrow the stock (super-simplifying it here folks) with the promise to pay in the future when you sell it. There is no bottom (or no “reverse ceiling”) to this amount of money and it can go badly very, very quickly.

So, if you buy the stock at $10 with the hope that it goes down to $0 (“shorting the stock”) but instead it goes to up to $20, you’ve lost some money. But what if it doesn’t stop and it goes to $200 dollars a share? You’ve now lost 10 times more!! These losses continue to pile up until you exit or until you’re able to pay your balance / “loan”.

The internet was made for this type of magic! Big thanks to my dad who taught me the fundamentals of investing when I was in Middle School!

  1. 4

    Long position: there is a floor, no ceiling.
    Short position: there's is a ceiling, no floor.

    1. 1

      There is if they used a stop loss.

      But why would you need a stop loss when you're in bed with the exchange, trading platforms, and regulators?

      1. 2

        Stop loss goes into effect at a certain point, but does not guarantee a fill at that price. Your loss can still be arbitrarily worse than the threshold you set.

        This is true about stop loss orders regardless of whether you're using a stop buy to manage losses on a short position or a stop sell to manage losses on a long position. The relevant difference is that the proceeds from your sale cannot go below $0, but the cost to cover a short has no upper bound.

        If you own a stock valued at $10 and place a stop loss to sell at $5, then the brokerage will create a market sell order for you when they see a sale for that stock below $5. That market order then gets filled at the prevailing price, which depends on what the other side of the order book looks like. Hopefully you get around $5, but worst case, it's $0.

        If you have shorted a stock valued at $10, and place a stop loss to cover at $15, same deal. When the brokerage sees a trade above your trigger price, you get a market order. That market order then gets filled at the prevailing price, which again depends on the other side of the order book at that time. Hopefully you can buy around $15, but worst case, it's $infinity.

        There are other related order types, like a stop limit order, which have different mechanics than a stop loss but still don't guarantee an actual limit to your losses.

        Every trade requires that someone takes the other side of the trade. The fact that you placed a stop loss order doesn't guarantee that anyone will agree to be your counterparty at that price when the time comes. What you can do is purchase options in advance, contractually obligating the option seller to be your counterparty under preset terms. But even then, it doesn't mean your short had limited downside... it just means you found someone else willing to sell you insurance.

  2. 2

    Pomp was raging about this yesterday: https://www.youtube.com/watch?v=sA055rUTbQk

    His words:

    This is the most un-American thing I've ever seen

    1. 1

      he does rage. i like pomp.

  3. 2

    Just a reminder that RobinHood allows onyl selling $GME but not buying in order for Melvin to be able to close their position.

    IIRC Citadel, market maker for RobinHood, is aware that this is illegal and will pay the fine.

    Anyone else finding this infuriating?

    1. 1

      yes. yes. and FUCK YES.

  4. 2

    I don't understand people or organizations who hold short positions in stocks for longer than one day.

    If you are going to short a stock, open your position with a stop at the amount you're willing to lose, and if the price starts going down, trail that stop (or re-enter lower stops manually), and close your position by 3:59PM.

    1. 1

      it's crazy negative... that's why i don't feel bad about those losses... that much. lol. these are super-rich people getting more super-rich. they can take a loss or two.

  5. 2

    Good explanation.

    Also Melvin Capital were over-confident with their trades, engaged in naked shorting (which is illegal -- the short interest on $GME is 140% of float, which to a novice person makes zero sense), they never set their stop-losses (rookie mistake lol), and of course when they were finally losing bad, they petitioned behind the scenes for the exchange (NASDAQ) and trading platforms, like Robinhood, TDAmeritrade, liquidity providers like Citadel, etc. etc., to rig the game in their favor so they can close out their shorts and not get completely liquidated.

    Who knew that billionaire hedge fund managers are actually crybaby pussies.

    On Robinhood now, you can only sell $GME, not buy, and some users even reported their positions being force-sold against their consent. It's like the economy is not even real anymore; those numbers on your screens mean nothing -- they can just wipe it off through their shenanigans.

    It's the equivalent of them unplugging your console when they're losing badly in a video game.

    They decide when your turn to play is up just so they can save their elite friends from financial ruin.

    The American economy is some rigged bullshit.

    1. 1

      The American economy is some rigged bullshit.

      Yup. 💯.

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