There are two things you need to know shorting and call options Shorting a stock means you borrow stock from someone and then sell it. The plan is for the stock to go down so you can rebuy it and give it back, pocketing the difference. Bob borrows from Tim 100 shares of XYZ that's trading at $50, agreeing to pay Tim interest until Bob returns the stocks. He sells them and has $5000 in his pocket. A while later XYZ has gone down to $30 and so Bob buys 100 shares and gives them to Tim. Bob walks away with $2000 minus the fees he paid to Tim for the loan. However, what happens if the price of XYZ goes through the roof? What if it shoots up to $250? Bob is in big trouble. He is paying interest that is eating him alive, but worse than that, Tim can force Bob to return the stocks right now seeing how bad his losses are. This is called a margin call. So Bob now has to come up with an additional $20000 of his own funds. Not good.
Shorting is really dangerous for the little guys. But for the billionaire hedge funds it's a different story. Normally they are so big and powerful that they can literally force the price of a share down, in part just by borrowing millions of shares and dumping them on the market. So for them, shorting a stock can just be free money. Never mind the people they hurt, and they hurt a lot of people.
That's what they did with GME. They shorted millions of shares. In fact they shorted 140% of GME's available stock. Example using round numbers: if GME had 10 million shares trading, the hedgies borrowed and sold all 10 million and then borrowed another 4 million of the previously borrowed stock. But what do they care? They can literally drive the price down whenever they want. Lack of a fear of consequences drives irresponsible behavior.
Well the little guys got wise to this and decided that they were going to destroy these big hedgie bullies. So they just started buying GME and refused to sell it. That caused the price of the shares to rise and rise and rise. They know that eventually the hedgies are going to need to buy millions of shares to cover their positions and by tying up all the stock, they could potentially inflict infinite losses on the hedgies. They could potentially bankrupt them, their parents, their parents' banks, etc. on down the line. They are setting up a short squeeze, which is a parabolic increase in share price caused by shorts that NEED to buy the stock. As long as people refuse to sell the price will go up and up and up until enough people have sold enough to allow the shorts to cover.
There is one other element at play, which is called a gamma squeeze. There are these things called "call options." Call options are contracts that say on XX day, you can buy 100 shares for $XXX each. Big institutions write the majority of options and they do a whole range of prices for a given day. The important thing to know is that if the stock closes above the option price, the option writer is required to sell the 100 shares to the option holder for the agreed upon price. So if I bought a call for XYZ that for $50 expiring on 1/29/21 and the stock is $75 dollars on that day, I can exercise my option and get my 100 shares for $5000 instead of the market price of $7500. If on the other hand, XYZ is $30, my call for $50 is worthless and so just expires.
See to write a call option, you don't actually need to have the shares that you are promising to sell. The call option writers bank on the fact that a bunch of the call options that are on the higher end of the option chain are probably going to expire worthless. If I write a call for $500 expiring tomorrow for a stock that's trading for $5, it's REALLY unlikely that the stock is going to shoot up to $500 in that short a period. So they write many options without actually having the underlying stocks to sell.
What happened on Friday (1/29) was that GME closed at $328. It just so happens that the biggest call option written for GME was $320. This means that EVERY option expired in the money. That means there are a lot of option writers that don't actually have the stock to sell that will NEED to buy those shares to sell. That's going to happen next week. If the price goes parabolic these option writers are going to 1. drive the price up because they HAVE TO buy and 2. incur massive losses as the price goes up (if they have to buy 100,000 shares at $500 to give to sell for $280, you can see how that can be very bad). These losses may trigger a margin call on the shorting hedgies who will now also have to buy. But even if not, they are bleeding billions of dollars in interest.
How bad it gets depends on how long the little people decide to not sell. So far, I've read that the shorts are down 54 BILLION. Considering that many people are doing this to hurt wall street, it could get pretty bad. But don't discount the temptation of making big money, the higher the price goes the more likely people will crack.
It's going to be wild and the fallout could be historic. Like 2008 or 1929 levels. Of course the difference between 2008 and now is that in 2008 the government hadn't spent the entire previous year printing money like it was going out of fashion and hadn't had interest rates in the basement already. I mean, seriously look at what they've done to the money supply..
This is my laymen's understanding and I welcome correction if I got anything wrong. Also this isn't financial or investment advice so don't make any decisions based on some internet randos post.
Some advice that isn't financial: Have some emergency supplies on hand. Brush your teeth. Call your parents.
They telling you what's coming. We've heard it multiple times: "right wing domestic terrorism is the country's biggest threat." They aren't joking. Look at how the Capitol protest is being portrayed. The "vetting" of national guardsmen in DC to weed out wrongthinkers. The calls for a "domestic intelligence agency" aka a secret police. In the next few months expect the rhetoric to get worse and for a flurry of bills and executive orders intended to target us. For those of us that are white and male in addition to holding right wing beliefs, we'll also get an extra helping. This will be done with the coordination of government, the private sector, individuals, and foreign actors. Likely many of us will have members of our family, our friends, and coworkers betray and ostracize us. All this with the knowledge that we have little chance of standing up for ourselves through the normal avenues of government. The lesson of the past four years and 2020 in particular is that elections are fraudulent and that every level of the justice system from law enforcement to prosecutors to judges are biased and corrupt.
All this means one thing: we are insurgents whether we like it not. So maybe think about doing things that might prepare you for that role. And no this doesn't mean you should build bombs, engage in violence, or take part in any illegal activity. I'm specifically disavowing such actions. Though, taking classes that will teach you the skills to defend yourself and your family lawfully are greatly recommended.
It does mean you should be building up contacts and networks, preferably local. As well as learning about tradescraft, secure communications, opsec, infosec, how law enforcement and intelligence agencies work, how insurgencies and counter-insurgencies work, etc. Also, reducing reliance on goods and services provided by large corporations, saving money, getting in shape, developing useful skills, stockpiling food and essentials, etc.
We can't stop what's happening. All you can do is maximize your ability to withstand it.
Don't forget: We can overcome. We can fight it.
Just a basic point: provided you aren't a glowie or shill, if you are inciting or planning violence or any other illegal activity over the internet or with far away people you met on the internet, you are a terminal idiot.
Some other points:
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Meatspace. With people that are from your area and that you can vet.
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The Gov has a big boner for the little guy, never forget. Especially white, right-leaning little guys.
Thanks for coming to my TED talk.
“Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats.”
― H.L. Mencken
“America is at that awkward stage; it's too late to work within the system, but too early to shoot the bastards.”
― Claire Wolfe
Feeling tempted? Is it too early?
