Holy moly, they’re at it again.
Yep, I’m talking about the Reddit army. The US-based group of retail investors linked together via Reddit’s WallStreetBets and other social media.
You probably remember the wild ride higher this collective sent the GameStop Corp (NYSE: GME) share price on last month. And the subsequent plummet.
Now they’re at it again.
GameStop shares surge 104%
Cutting to the chase, the GameStop share price leapt 104% yesterday (overnight Aussie time). Shares opened at $44.97 and closed the day at $91.71.
But it’s not over yet.
In after-market trading, the GameStop share price is currently at $169.10. In other words, 85% above where it closed just hours ago. Though mind you, that’s still well below the 27 January peak, when the retail army’s trading frenzy saw shares close at $347.51.
The déjà vu price action could be another effort to trigger a short squeeze. And it will likely again bring short selling – where you hope to profit when a company’s share price falls – onto investors’ radars.
With that in mind, we turn to Adam Smith, CEO at Saxo Capital Markets Australia, for some insight.
Short selling or put options?
According to Smith:
No-one disagrees with the practice of short selling per se as it affords traders and investors a mechanism to trade their view. For example, if they perceive a listed company to be overvalued relative to fundamentals or set for a pullback in advance of a results announcement, they can take a short position on the stock. This is all fair and legal.
However, a naked short sale of shares is not the only way they can express their view. They could also buy put options over the stock with the same outcome, but we don’t see anyone crying foul over people buying puts – suggesting the real issue lays elsewhere.
If you’re not familiar, put options give the buyer the right, but not the obligation, to sell a certain number of shares at a predetermined price by a certain date. If a company’s share price falls, the put option will be ‘in the money’, and the investor will bank the gains minus the put purchase fees. Of course, if the share price rises, the put options are worthless, and the investor is out the price of the put options.
As Smith points out, there has never been a broad backlash against put options. So why so much angst over short selling? Smith says:
That issue is a perceived lack of regulation over the methods adopted by some short sellers, such as looking to issue damning reports that may or may not be factually correct then profiting from the ensuing share price movement.
What’s required now is clarity over whether the spread of misinformation is a form of market manipulation that needs to be policed in the same way as other market misconduct matters.
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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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