View Full Version : The GameStop Short Squeeze
I’m reading about how online groups of small amateur day traders are squeezing the short positions of some larger traders, driving share prices to ridiculous levels. I’m no believer in market timing, but this seems to me to be heralding a silly season that will probably end badly for all but a fortunate few.
Wow, to show how clueless I am in trading matters, I have no idea what you just said. I'm just glad that of out of the few individual stock shares I own, lately only one has done well over the past week, and that is a Canadian pot company (and I don't mean Calphalon).
I've been reading about this too. GME is a stock I used to sell covered calls on; when I first bought it back in 2000, it was about 25 and I bought it because my adolescent kids loved the store.
This is quite a story, isn't it. My one son was talking to me about opening a Robinhood account and I said why, you can do anything they do with your Schwab account except get in a lot of trouble, but maybe he was on to something.
It's like The Big Short or something.
Who will be in the movie?
I have no idea what you just said.
Some hedge fund managers had a short position on this stock, meaning they were betting on it going down in price. These reddit folks are making the stock price go up, so the hedge fund managers are screaming because their sure bet didn't' go the way they had planned.
Good for the reddit folks. I hate that parts of the economy are driven by legal gamblers who contribute nothing in the way of products or services. Maybe the reddit folks fall into the same category, but I'm happy with a little disruption to the trading floor and hedge fund managers.
GeorgeParker
1-28-21, 2:38pm
Good for the reddit folks.Those Reddit folks are engaged in an illegal activity known as "pump and dump". A few of them make money, the big traders who had legitimate, totally legal, short positions lose money. And innocent people who got caught up in the false cries of "lets stick it to the big guys" end up losing everything they invested. With any luck at all the Reddit people who started that scheme will go to jail, but that's highly unlikely.
Those Reddit folks are engaged in an illegal activity known as "pump and dump". A few of them make money, the big traders who had legitimate, totally legal, short positions lose money. And innocent people who got caught up in the false cries of "lets stick it to the big guys" end up losing everything they invested. With any luck at all the Reddit people who started that scheme will go to jail, but that's highly unlikely.
As I am unfamiliar with the legalities of trading, I take your word for it, and thank you for the education. I don't want innocent people to lose money. But I have a bias against people, like hedge fund managers, who generate wealth by betting on air.
GeorgeParker
1-28-21, 4:13pm
The laws and regulations that govern trading are very complex and trying to prove intent is often difficult. That's why Martha Stewart was convicted for lying to an FBI agent about insider trading, but not charged with insider trading itself.
I know enough to recognize that what the hedge funds were doing is legal and what the people who started the Reddit scheme were doing was a conspiracy to artificially manipulate the price of Gamestop stock.
Morally my sympathies are with the people who got caught up in this whole thing innocently and were left holding the bag when the exchange halted trading on Gamestop stock because of the obvious manipulation.
What is it about "hedge funds" that upsets people so?
What precisely is a "hedge fund"?
What activities does it engage in?
GeorgeParker
1-28-21, 4:35pm
What is it about "hedge funds" that upsets people so?
What precisely is a "hedge fund"?
What activities does it engage in?Mostly arbitrage and trading derivatives. For example they buy something on the Chicago exchange or the London exchange and at the same time sell it at a slightly higher price on the New York exchange. It's basically the same thing day traders do, but with a lot more money and a lot more leverage and at a much higher speed. The name hedge fund basically comes from the fact that when they do it right all of their bets are hedged by making an offsetting buy and sell at the same time. And if it isn't done right, you get the Long Term Capital Management scandal.
iris lilies
1-28-21, 4:49pm
What is it about "hedge funds" that upsets people so?
What precisely is a "hedge fund"?
What activities does it engage in?
I do not actually know!
I don’t understand people who think when they make money on the stock market it’s OK but those big players who make money on the stock market, that’s not OK.
Those big money guys are often managing my money as well as theirs so that we can all make money! Making money is good!
I do not actually know!
I don’t understand people who think when they make money on the stock market it’s OK but those big players who make money on the stock market, that’s not OK.
Those big money guys are often managing my money as well as theirs so that we can all make money! Making money is good!
I do need to understand this, and I thank bae for forcing me to think it through.
How does betting on futures help the small farmer, or help the small businessman with an innovative idea, or help a city grow?
In my ignorant, democratic socialist perspective I see it as a way for people with means to play around with their money and get richer. It does nothing to help the economy of the every day worker. Please persuade me otherwise.
A FB friend posted this:
3602
And this is what she replied:
Interesting result. Several trading apps restricted trading on "certain stocks" because of "volatility". Duff Goldman, famous for "The Ace of Cakes", made the following comment on Twitter: "So when individuals figure out how to use the internet against the old money regime, it takes less than 24 hours to shut them down. But when racist nazi white supremacists use it to spread hate, violence, and insurrection, well, that’s just free speech. Got it."
ApatheticNoMore
1-28-21, 5:27pm
I don’t understand people who think when they make money on the stock market it’s OK but those big players who make money on the stock market, that’s not OK.
I don't think ok or not even factors into decision making. A close enough analogy: I'd take a job that did no particular good, a BS job, a pointless job, a job that barely assigned work, dig holes and fill them up again, and cash the checks just the same on payday. Is such job doing much good, no not really but. I'd just draw the line if said job was extremely evil is all.
I don’t understand people who think when they make money on the stock market it’s OK but those big players who make money on the stock market, that’s not OK.
Because it feeds into those feel-good stats that the economy is doing hunky-dory when it's only doing hunky dory for the 10% who are doing great. The rest are doing fair to middling. Money at that level does NOT trickle down.
What is it about "hedge funds" that upsets people so?
I know your questions are just part of your Socratic education, but I will answer as if I didn't know that. The reason people are typically upset is because when there are any stories in the news about hedge fund managers, it is usually prepended with "billionaire" and people hate someone that kind of money out of "nothing".
iris lilies
1-28-21, 6:45pm
I do need to understand this, and I thank bae for forcing me to think it through.
How does betting on futures help the small farmer, or help the small businessman with an innovative idea, or help a city grow?
In my ignorant, democratic socialist perspective I see it as a way for people with means to play around with their money and get richer. It does nothing to help the economy of the every day worker. Please persuade me otherwise.
I’m not gonna change your mind. But I’m not clear, is it just futures trading that disturbs you?
If I want use your words against you I could say “people with means play[ing] around with their money [ to get ] richer” is what we all do In any sort of investment.
Catherine, here is a good piece on the definition of a hedge fund:
https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp#:~:text=A%20hedge%20fund%20is%20just%20a %20fancy%20name,the%20investors%2C%20sometimes%20k nown%20as%20the%20limited%20partners.
I do need to understand this, and I thank bae for forcing me to think it through.
How does betting on futures help the small farmer, or help the small businessman with an innovative idea, or help a city grow?
In my ignorant, democratic socialist perspective I see it as a way for people with means to play around with their money and get richer. It does nothing to help the economy of the every day worker. Please persuade me otherwise.
There are many ways options or futures can limit risk for shareholders, or producers and consumers of commodities.
As to speculation: if Party A wants to speculate on the upside and Party B wants to speculate on the downside, why should it be anybody’s business but theirs?
I have used options and futures and other such things to manage ("hedge") the risk in my own portfolio for ages.
I don't strive for maximum yield, I instead aim at achieving a reasonable return with less risk, and these tools help me sleep at night.
iris lilies
1-28-21, 7:23pm
Because it feeds into those feel-good stats that the economy is doing hunky-dory when it's only doing hunky dory for the 10% who are doing great. The rest are doing fair to middling. Money at that level does NOT trickle down.
I only have these things to say:
1. I don’t subscribe to the idea that if some are miserable we all must be miserable
2. Feelings are not facts—there are plenty of misery-indicators for you to promote, if you prefer those measures. Skip over positive financial news if you like.
Today I heard discussion of the GDP for 2020 and it was not hunky dory although the stock market still looks pretty good to me. Our country’s financial health is complicated with many measures.
1. I'm not suggesting that I am miserable. I'm quite happy. It's not a question of misery. Money does not buy happiness. It's more of a question of power and control at the top.
2. I agree that feelings are not facts, and I agree that my feelings drive my suspicion that high rollers in the playground of hedge funds are not contributing a whit to society. As LDAHL says, that's their business, but when they start whining about retail players grabbing their marbles, it's just... annoying. And it points to a need to re-examine the rules of engagement to make sure the playing field is even.
Yes, economics is crazy complicated, and I admit to being a no-nothing in this area. I believe capitalism has its benefits and it has its limitations.
Here's an article by Ray Dalio (https://www.marketwatch.com/story/founder-of-worlds-biggest-hedge-fund-says-capitalism-needs-urgent-reform-2019-04-05) which supports the idea that having a system that fosters a Monopoly game with vast wealth inequality is good for some but sucks for others.
The playing field, in this game, will not be even for the retail investor against the Big Player. The Big Player has access to more computing power, PhDs in statistics and astrophysics, and has the ability to do things an individual player simply can’t.
Knowing that, individual investors should tailor their actions to fit...
GeorgeParker
1-28-21, 8:50pm
This is going to keep getting more and more interesting. The lawsuits are already starting in both directions, and calls for the SEC to investigate are already being issued by members of congress who think opposite sides of the issue should be investigated depending on who their constituency is.
Even Elon Musk (who ought to keep his mouth shut!) has weighed in via Twitter against the short sellers, even though short sellers lost $40 million in 2020 by selling Tesler stock short.
And this brouhaha has barely begun.
So can someone more intimately familiar with hedge funds answer this question. Are hedge funds using derivatives and such to reduce their portfolio's risk or are they simply gambling but calling it investing? It's not clear to me what the risk to their portfolio was that the hedge funds were trying to minimize by shorting Gamestop?
Very interesting interview with Jordan Belfort, the guy from the Wolf of Wall Street biopic:
Takes One to Know One: ‘Wolf of Wall Street’ Jordan Belfort Tells CNN There’s ‘Illegal’ Activity Involved With GameStop Chaos (msn.com) (https://www.msn.com/en-us/tv/news/takes-one-to-know-one-wolf-of-wall-street-jordan-belfort-tells-cnn-there-s-illegal-activity-involved-with-gamestop-chaos/ar-BB1dbROE?ocid=msedgntp)
Worth reading for background.
So can someone more intimately familiar with hedge funds answer this question. Are hedge funds using derivatives and such to reduce their portfolio's risk or are they simply gambling but calling it investing? It's not clear to me what the risk to their portfolio was that the hedge funds were trying to minimize by shorting Gamestop?
Hedge funds can do either. They are private pools of capital that can take long term investment positions or legally speculate as they please. In this case they borrowed shares and then sold them in the hope that the share price would be lower when they had to be returned. The risk they took was “He who sells what isn’t hiz’n must buy it back or go to prison”. But it was their risk to take, which a qualified hedge fund participant probably understands at least as well as a gaggle of part time day traders.
Any investment is to some degree “gambling”. But so is getting out of bed in the morning.
This is why we stick with both equity and bond funds only. As two of my professors in college stated; (1) always have 6 months of expenses in savings and (2) put half of your investments in equities and half in bonds. For disclosure our portfolio is more like +60% bonds and -40% equities.
GeorgeParker
1-29-21, 9:37am
Because it feeds into those feel-good stats that the economy is doing hunky-dory when it's only doing hunky dory for the 10% who are doing great.The Market is not The Economy. The Market is people buying and selling things based on what they think The Economy (or certain parts of it) will be doing 6-12 months from now.
Most of the time The Market is rational. But even when it's rational, it contains a lot of small emotional wriggles.
Sometimes The Market becomes irrational as it did during the internet bubble in the 1990s and as the real estate market does every 10-20 years.
And sometimes specific sectors or stocks become irrational, like the current price of Amazon stock, which jumped from $1600/share to $3400/share in 6 months because of the Covid Pandemic. If Amazon gave all of its profits to it's shareholders every year, it would take 98 years of profit for the shareholders to receive $3400/share. So Amazon's stock price is currently irrational. People are betting on Amazon growing at an incredible rate. Or more likely the Smart Money is betting on Amazon's stock price going up for a little while longer so they can sell the stock they bought at an irrational price to some bigger fool at an even more irrational price.
The Market is not The Economy. It's just a wobbly reflection of what people with money think The Economy is going to do sometime in the future.
Amazon stock price chart January 2011-January 2021:
3603
GeorgeParker
1-29-21, 10:32am
This is why we stick with both equity and bond funds only. As two of my professors in college stated; (1) always have 6 months of expenses in savings and (2) put half of your investments in equities and half in bonds. For disclosure our portfolio is more like +60% bonds and -40% equities.I disagree with your professors.
Previously it was common for people to advise having 3 months of living expenses in an emergency fund (savings account or bank CDs) and to split your investments between stocks and bonds using a formula based on your age (the older you are, the more you put in bonds). And the smart advisors would tell you the best investment is paying off all of your debt, with the possible exception of your mortgage if it has a low interest rate.
But when the internet bubble burst in 2001 it caused thousands of IT workers to lose their jobs and become unemployable, thereby forcing them to take jobs that paid 50% or 25% of their former wages. And the Covid Pandemic has caused tens of thousands of low-wage workers to lose their jobs long-term (most of whom had little if any money saved or invested). So the new smart rule is to have no debt and to have at least a year of minimum living expenses readily available in savings or in investments that can be easily converted to cash within a few days or at most a few weeks.
I'm retired and I get a monthly Social Security check that is half as much as my wages used to be but covers all of my current minimum living expenses, so I keep only one month of living expenses in my saving+checking account. The rest I have invested in my Roth IRA and a small taxable brokerage account, both of which are 80% high-quality stocks that pay good dividends and 20% carefully chosen option spreads. Everything in my brokerage accounts could be turned into cash within 72 hours if I had to do that. I don't do bonds, but that's a personal choice.
For people who have no interest in choosing individual investments and no interest in learning how to do so (99.44% of the people I've met) I always recommend going to this web page https://www.bogleheads.org/wiki/Lazy_portfolios and picking any of the lazy portfolios listed there, because they let you add or remove small amounts of money easily and they all consist of well-known mutual funds with low management fees.
Do whatever makes you feel comfortable about your investments and keeps you from panicking when the newspaper headlines get scary.
The playing field, in this game, will not be even for the retail investor against the Big Player. The Big Player has access to more computing power, PhDs in statistics and astrophysics, and has the ability to do things an individual player simply can’t.
Knowing that, individual investors should tailor their actions to fit...
And even well-resourced large players don’t seem to be able to consistently beat market averages. Often, their astrophysicists seem no more effective than astrologers at predicting market movements.
This has led me to believe in a low-cost, low-effort strategy of maintaining a static allocation using index funds and calling it a day.
GeorgeParker
1-29-21, 11:43am
In this MarketWatch article https://www.marketwatch.com/story/gamestop-sagas-real-lesson-dont-short-troubled-companies-at-the-start-of-an-economic-cycle-11611856585 Nicholas Colas, co-founder of DataTrek Research, give his opinion of this mess.
Some quotes I consider especially interesting:
Here’s the lesson: “Don’t short troubled companies at the start of an economic cycle.”
"GameStop, the videogame retailer, did not look horrible." [and] “‘Not horrible’ is good enough when capital markets are rallying due to optimism over the future,” Colas said. And that’s what stocks were doing as they extended the rebound from the early 2020 pandemic selloff to push further into record territory in the new year, buoyed by continued optimism over COVID-19 vaccine rollouts.
“Retail investor wolf packs are new, but if you’ve ever sat on a hedge fund trading desk you know squeezing shorts has been a Wall Street blood sport for decades,” Colas said.
Hedge funds can do either. They are private pools of capital that can take long term investment positions or legally speculate as they please. In this case they borrowed shares and then sold them in the hope that the share price would be lower when they had to be returned. The risk they took was “He who sells what isn’t hiz’n must buy it back or go to prison”. But it was their risk to take, which a qualified hedge fund participant probably understands at least as well as a gaggle of part time day traders.
Any investment is to some degree “gambling”. But so is getting out of bed in the morning.
I was just responding to other people's posts that they used derivatives to offset other potential losses. Which seems a reasonable use of them. Sure, the guys in The Big Short got really rich off the housing market crash, but did they actually benefit the economy, or society, or frankly anything other than their own personal bottom lines? And the hedge funds shorting Gamestop, if successful in their goal of sending the company into bankruptcy, were worse than just only benefitting themselves, they were actively harming a viable company. How is that a good thing in any way?
This has led me to believe in a low-cost, low-effort strategy of maintaining a static allocation using index funds and calling it a day.
Bingo.
dado potato
1-29-21, 1:04pm
There have been short squeezes in heavily shorted stocks for the past year (or longer), and day-trading retail investors (needing something to do while at home during the COVID-19 pandemic) "got the speculative bit between their teeth"... to quote David McAlvany, a dealer in precious metals and a registered investment adviser who is implementing a "Tactical Short Strategy". Social media, including the reddit site r/WallStreetBets and twitter Will Meade, are a couple of places where day-traders may have been getting ideas about heavily shorted stocks, or information about the existing short positions of hedge funds (such as Melvin Capital). I have not joined the reddit group, but I had a look at a few of Meade's tweets. I am no lawyer, but I wonder if the targetting of hedge funds goes beyond touting a stock because you want it to go up, to a conspiracy to bring losses to a hedge fund.
In the first month of this year, hedge fund Melvin Capital assets dropped by 30% (-$3.75 billion). I gather that losses on their put option contracts (as redditors bid up the stocks) put Melvin Capital in dire straits.
Meanwhile, the rapid rise in share prices created a situation which at least one heavily shorted company, AMC (movie theaters) found it advantageous to offer more shares. I believe AMC had 58 million shares outstanding in October, and they have been able to increase the share count to 337 million.
The SEC has warned that people who abused the retail investor will be punished. A number of retail brokers are preventing their account holders from buying the heavily shorted stocks that appear to be in a short squeeze, without any release of information about an improvement in the corporation's business fundamentals.
Senators Tammy Baldwin and Elizabeth Warren already have sponsored legislation (in past years) to increase regulation of perceived abuses in US stock markets. There will be further developments, to be sure.
Accrual World
1-29-21, 1:49pm
This is why we stick with both equity and bond funds only. As two of my professors in college stated; (1) always have 6 months of expenses in savings and (2) put half of your investments in equities and half in bonds. For disclosure our portfolio is more like +60% bonds and -40% equities.
Agreed on having a fairly large emergency fund, but 6 months is a bit excessive.
Unless you are at or a few years from retirement, half of of your portfolio being in bonds is far too conservative.
Here's a listing of the absolute worst periods of stock market performance (basically assumes that you invested the bulk of your portfolio the day before a massive crash)
https://www.thebalance.com/rolling-index-returns-4061795
Over 15 and 20 year periods, even through the worst historical cases, you would be better off in the equities.
My portfolio is primarily in a total market index. Do whatever makes you feel comfortable, but just wanted to let you see the numbers if behind it.
ApatheticNoMore
1-29-21, 2:01pm
I don't at all think 6 months emergency fund is excessive. I'd lean to more like at least 2 years. Having been unemployed close to a year and never less than 5 months in any bout of uemployment, in what universe is 6 months excessive? Not the one I actually live in. Oh and when I was unemployed I ended up needing (yes actually needing, if I could have put it off, you bet I would have) a new (used) car. Dohs. When it rains it pours. So I got a car, but I had more than 6 months in an emergency funds.
But you might receive unemployment? Yes depends on circumstances, if you ever have to quit maybe not, and if you are unemployed in a global pandemic where the unemployment system breaks down (this actually happened to many) maybe not, but yes in many more typical cases you may get unemployment. But you can't live on unemployment, it pays too little, but it will provide some income.
I was just responding to other people's posts that they used derivatives to offset other potential losses. Which seems a reasonable use of them. Sure, the guys in The Big Short got really rich off the housing market crash, but did they actually benefit the economy, or society, or frankly anything other than their own personal bottom lines? And the hedge funds shorting Gamestop, if successful in their goal of sending the company into bankruptcy, were worse than just only benefitting themselves, they were actively harming a viable company. How is that a good thing in any way?
I would think it would be very difficult to profitably short a viable firm out of existence. I would also think it unwise to demand either a hedge fund or my IRA to function altruistically.
I suppose too many screenwriters have found it easy to make “hedge fund manager” synonymous with “villain” for pundits to resist spinning this situation into a ragtag band of Reddit rebels sticking it to “Wall Street”.
I would think it would be very difficult to profitably short a viable firm out of existence.
I'm curious about what the mechanism even is to drive the company out of business by short-selling?
The company has already sold its stock to the market, driving the stock to $0 won't really impact the day-to-day operations, except maybe in allowing it to repurchase stock at discounted prices and go private.
I mean, sure, if your compensation packages for your employees are linked to your stock or stock performance, there are some issues, and your shareholders may decide to boot the management team for whatever reason, but...
How does short-selling put a functioning and viable company out of business?
I suppose too many screenwriters have found it easy to make “hedge fund manager” synonymous with “villain” for pundits to resist spinning this situation into a ragtag band of Reddit rebels sticking it to “Wall Street”.
I also love that now everybody on the Internet is a subject matter expert on investing, stock market strategies, and so on. I guess once they all got their Ph.D.s in epidemiology they moved on to their next hobby.
How does short-selling put a functioning and viable company out of business?
The article George Parker linked to above pointed out how. By making the debt market wary of and increasingly inaccessible to them.
The article George Parker linked to above pointed out how. By making the debt market wary of and increasingly inaccessible to them.
I don’t see that working unless the company was already among the walking dead, in which case it might accelerate the process.
If there is value there, I would think that at some point if the share price was driven low enough, it would attract investors based on the firm’s fundamentals or people would recognize the opportunity for a profitable short squeeze. There is a tendency to ultimately revert to reality.
Having every share and even nonexistent shares shorted would certainly potentially give a false sense of being walking dead.
Having every share and even nonexistent shares shorted would certainly potentially give a false sense of being walking dead.
Typically one looks at profitability, market share, overall market potential, management team, barriers to entry for competitors, and things like that to see if an enterprise continues to be viable.
The shares kicking around on Wall Street, and their prices, don't figure all that much in the analysis.
GeorgeParker
1-29-21, 5:12pm
Typically one looks at profitability, market share, overall market potential, management team, barriers to entry for competitors, and things like that to see if an enterprise continues to be viable. The shares kicking around on Wall Street, and their prices, don't figure all that much in the analysis.Correct. And if the short sellers drive down the value of a stock by flooding the market with excess shares, buyers will at some price rush in to snap them up at a bargain price.
The article George Parker linked to above pointed out how. By making the debt market wary of and increasingly inaccessible to them.I just reread the article I linked to https://www.marketwatch.com/story/gamestop-sagas-real-lesson-dont-short-troubled-companies-at-the-start-of-an-economic-cycle-11611856585 and I see nothing at all in there about short selling "making the debt market wary of and increasingly inaccessible to them." jp1 is obviously confusing the article I referenced with something he read somewhere else.
This is hilarious:
https://www.cnn.com/2021/01/29/investing/wallstreetbets-reddit-culture/index.html
iris lilies
1-29-21, 7:00pm
This is hilarious:
https://www.cnn.com/2021/01/29/investing/wallstreetbets-reddit-culture/index.html
Do we all want omar’s student loans to be forgiven?
I also love that now everybody on the Internet is a subject matter expert on investing, stock market strategies, and so on. I guess once they all got their Ph.D.s in epidemiology they moved on to their next hobby.
Was the Ph.D. before or after the degree in Constitutional Law?
This is hilarious:
https://www.cnn.com/2021/01/29/investing/wallstreetbets-reddit-culture/index.html
After reading the article, my first thought was, "sounds like every subreddit I've ever spent time in". The active ones I follow all seem to centralize on some group norm, regardless of how realistic that norm might be in actual life or how much it deviates from conventional wisdom (sometimes because it deviates from conventional wisdom). Newbies who come in thinking differently either conform or leave.
There's some amazingly useful stuff on reddit, but you've got to sort through a pile of "me too" to find it.
ApatheticNoMore
1-29-21, 8:02pm
High frequency trading is so oughts. What matters is high frequency vaccine appointments.
This is hilarious:
https://www.cnn.com/2021/01/29/investing/wallstreetbets-reddit-culture/index.html
So this young man speculated with money he couldn’t afford to lose in options and lost it all. Then he decided to speculate some more using federal stimulus and student loan money because he drank the internet Kool Aid about punishing Wall Street and getting rich quick. And when he loses that, we will hear about how he was victimized.
A fool and his money are soon subsidized.
iris lilies
1-30-21, 1:25pm
So this young man speculated with money he couldn’t afford to lose in options and lost it all. Then he decided to speculate some more using federal stimulus and student loan money because he drank the internet Kool Aid about punishing Wall Street and getting rich quick. And when he loses that, we will hear about how he was victimized.
A fool and his money are soon subsidized.
“A fool and his money are soon subsidized. “
My new favorite pithy saying. My voice translator keeps switching back-and-forth between pissy and pithy. OK, Either works.
iris lilies
1-30-21, 1:26pm
So this young man speculated with money he couldn’t afford to lose in options and lost it all. Then he decided to speculate some more using federal stimulus and student loan money because he drank the internet Kool Aid about punishing Wall Street and getting rich quick. And when he loses that, we will hear about how he was victimized.
A fool and his money are soon subsidized.
I like the way he ran out after losing the first batch and scratched together every dime he could get and came up with $22,000. WTF, what poor student can normally come up with that kind of cash!
ApatheticNoMore
1-30-21, 1:34pm
Truthfully he's young and smart and probably has a bright future ahead of him (to the extent anyone has alright Greta). He's just young and making stupid choices.
This is hilarious:
https://www.cnn.com/2021/01/29/investing/wallstreetbets-reddit-culture/index.html
He's got a bright future at one of the big investment banks. It'll be easy to scrap together more money once he works for a company that's "too big to fail."
WTF, what poor student can normally come up with that kind of cash!
One with government guaranteed educational borrowing capacity. Although you could make the argument that the results of following someone called “Roaring Kitty” into the jaws of financial doom amounts to an educational experience of a sort.
A relevant story from last July:
https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html
GeorgeParker
1-31-21, 1:07pm
A relevant story from last July: https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.htmlThis is nitpicking, but this paragraph is wrong in two ways:
"Mr. Tenev said only 12 percent of the traders active on Robinhood each month used options, which allow people to bet on where the price of a specific stock will be on a specific day and multiply that by 100. He said the company had added educational content on how to invest safely."
First, when you buy a call option you're betting that the price of that stock will be higher than a certain price at some time between now and the option's expiration date. When you sell a Put Option you're betting the price will be lower. You are never betting that the stock price will be a certain price, only higher or lower than a certain price. And you're not betting it will be that price on a certain date either, only that the price you're looking for will happen before a certain date. Example: If I buy a March AT&T $50 Call Option, I can sell that option or call for the stock to be delivered to me at any time between now and the 3rd Friday of March.
Second, an option doesn't "multiply your bet by 100". An option is always for 100 shares of stock but the option price is always quoted on a per-share basis. So when you buy or sell an option, the price you pay is 100 times the quoted price, but that has nothing to do with how much leverage the option is giving you. It's just the way stock options are quoted.
People who don't understand the stock market ought not to write articles about it, especially if they work for the New Yalk Times!
People who don't understand the stock market ought not to write articles about it, especially if they work for the New Yalk Times!
I was mostly interested in the discussion of RobinHood turning "investing" into a dopamine-hit producing phone-game-app sorta thing. Angry Birds, but with money.
That always ends well. "Rat Park" may also be instructive.
GeorgeParker
1-31-21, 2:20pm
I was mostly interested in the discussion of RobinHood turning "investing" into a dopamine-hit producing phone-game-app sorta thing. Angry Birds, but with money. That always ends well. "Rat Park" may also be instructive.In June 2020 a Robinhood trader panicked and committed suicide when he mistakenly thought he had lost $750,000, which was a lot more than his entire net worth.
If he had been more mature and less emotional, he would have waited a while before killing himself so he could double check the numbers and be certain he had really lost that much. But he took the numbers at face value and killed himself.
Straight News Report: https://www.youtube.com/watch?v=vjyLQCo12NM
A Technical Explanation of Why His Account Showed a (Temporary) $750,000 Loss: https://www.youtube.com/watch?v=no_q6sJXjm8
(https://www.youtube.com/watch?v=no_q6sJXjm8)Combine the youth and inexperience of Robinhood traders with the macho nihilistic "it's only money" attitude of the WallStreetBets sub-Redit and you might as well be juggling bottles of nitroglycerin. A lot of people are going to get hurt.
https://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of _Crowds
GeorgeParker
1-31-21, 7:32pm
A relevant story from last July: https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.htmlThe most disturbing part of that article is this paragraph:
"After funding his [Robinhood] account with $15,000 in credit card advances....As he repeatedly lost money, Mr. Dobatse took out two $30,000 home equity loans so he could buy and sell more speculative stocks and options, hoping to pay off his debts."
Rule number one for newbies is NEVER NEVER NEVER speculate with borrowed money, not even with "margin", which is just automatic borrowing with your broker as the lender.
Rule number one for newbies is NEVER NEVER NEVER speculate with borrowed money, not even with "margin", which is just automatic borrowing with your broker as the lender.
Come on, have some sympathy for the house!
Next you're going to be telling us not to play the slots!
Come on, have some sympathy for the house!
Next you're going to be telling us not to play the slots!
Hey! Don't diss them, I had a big win with the slots the last time I gambled, maybe 25 years ago. I was changing planes in vegas and had some time to kill and two quarters burning a hole in my pocket. I lost with the first one but the second one I scored about $7 or $8! I grabbed one of those cups (it was so long ago the machines still spit out actual coins), scooped up my winnings and went to the bar next to my departure gate and celebrated my windfall by spending it on a large beer! The house lost big that night.
I saw my Dad gamble once. We were driving through Nevada, and he put a quarter into a machine at a gas station/rest stop, and a whole pile of money poured out. "I think I'll stop while I'm ahead", he quipped, and I never saw him gamble once after that.
I "gambled" a lot in college to help pay my way, in Atlantic City, but I was a statistician, and our whole department made a bit of a business out of playing blackjack. The way we did it wasn't strictly speaking "gambling", which is why I suspect I probably shouldn't pop back in for a visit even now :-)
I see GME is down 84% this week.
My husband threw me a party for my 60th birthday, and part of that was taking our guests to Mohegan Sun for the evening. I'm not a gambler.. As part of my dysfunctional attitude toward money, I don't WANT to win.
But the Fates laughed at me that night. I tried to get $20 out of the ATM to play the slots but of course you could only take out a minimum of $100. So I said, what the hell--I'll just play $20 and then cash out.
So I was sitting there like a zombie pressing the buttons (you don't even have a one-armed bandit anymore) and all of a sudden the bells went off, and I had won $1500. Not a huge windfall, but a great birthday present!
Catherine, inquiring minds want to know, did you stick to the $20 limit you intended or were you further into the $100 when you had the win?
what a great birthday, Catherine!!
Catherine, inquiring minds want to know, did you stick to the $20 limit you intended or were you further into the $100 when you had the win?
OK, you got me. I think I was at dollar #40 when I hit.
iris lilies
2-5-21, 11:30am
Catherine, that is a nice Wynfall. But I understand the zombie remark. I think slots are incredibly boring. You sit there and press a button, big deal. I don’t get that attraction. I do see though that I could get addicted some of the other games of chance.
My sister-in-law on something like $13,000 of the slots many many years ago. But you know what? We don’t know how much she spent and how many time she went there to win that big account.
My beloved was a casual small stakes gambler. When he crowed over a win, I always asked him how much he had spent before his jackpot came up (in my usual buzz-kill fashion). The last time I gambled, I lost two dollars, then played until I won it all back and quit. I'd be a dud at a casino, but I spend money foolishly in other ways.
Catherine, that is a nice Wynfall. But I understand the zombie remark. I think slots are incredibly boring. You sit there and press a button, big deal. I don’t get that attraction. I do see though that I could get addicted some of the other games of chance.
My sister-in-law on something like $13,000 of the slots many many years ago. But you know what? We don’t know how much she spent and how many time she went there to win that big account.
Slot machine psychology fascinates me. Here's a video that gives you some idea of why they are addictive to many:
https://www.youtube.com/watch?v=CYoQrL1hKoo
Gambling has never held any appeal for me. I'm always amused when I talk to people who've been gambling, who invariably claim they came out "a little ahead" or "a little behind." If it's always "a little" you have to wonder where the gambling industry's billions of dollars in annual profits come from. :laff:
If it's always "a little" you have to wonder where the gambling industry's billions of dollars in annual profits come from. :laff:Not from me! I started gambling while in the service in the early 70's, playing blackjack in the barracks. That didn't last long after losing two consecutive monthly paychecks and I swore off gambling forever. I made good on that promise to myself until we passed through Reno a few years ago and my wife and I decided to risk $20 each on the slot machines in the casino we visited for dinner. True to form, I lost my $20 within minutes while my wife went up $107 within the same time frame. She cashed out right away and we left with "a little" profit after accounting for initial stake and the price of dinner.
Slot machine psychology fascinates me.
The psychology of the entire experience fascinates me.
For several years I got to join other members of the family (who like to gamble more than I do) at a local casino because, during the week we all had our birthdays, we got freebies at the casino. I did win at bingo once in several years of attendance; that was about the extent of my winning.
But the entire environment is engineered -- the machines/games, the response of the machines to people winning, the décor (no clocks on the walls; who needs a reminder to quit gambling?), the noise level (which has a rough pattern to it if you listen long enough),... Not being so engaged in winning or losing, I find it a very interesting study.
The casino environment is definitely interesting. Since I don't gamble I've never found it particularly appealing but maybe if I'd had some big wins in that environment I would understand it better.
Thinking about casinos I'm reminded of the movie Run Lola Run. It's a German movie and on the third and final trip through the day's events (the concept of the movie was that minor changes in circumstances can have major effects) Lola goes to a german casino because she needs to get a large amount of money very quickly to save her boyfriend's life. The German casino was totally unlike any American casino. It was quiet and stately and populated by quiet old men in suits quietly playing games at the tables.
The casino environment is definitely interesting. Since I don't gamble I've never found it particularly appealing but maybe if I'd had some big wins in that environment I would understand it better.
Thinking about casinos I'm reminded of the movie Run Lola Run. It's a German movie and on the third and final trip through the day's events (the concept of the movie was that minor changes in circumstances can have major effects) Lola goes to a german casino because she needs to get a large amount of money very quickly to save her boyfriend's life. The German casino was totally unlike any American casino. It was quiet and stately and populated by quiet old men in suits quietly playing games at the tables.
So jp!, did she save her boyfriend's life. Don't leave us hanging in suspense.
So jp!, did she save her boyfriend's life. Don't leave us hanging in suspense.
LOL. Actually we don't know. The movie goes through three potential scenarios, all with different results because in each one minor differences change everything. In the last version of reality he is able to return the money, but which one is "reality" is anyone's guess. It was actually a really fun movie. It looks like you can rent it on youtube for $4. https://www.youtube.com/watch?v=5uq2wblNt2o
"How does betting on futures help the small farmer, or help the small businessman with an innovative idea, or help a city grow?"
Catherine,
For now, set aside helping cities and set aside the fact there are futures contracts on things like weather. Instead, focus on a farmer and a small business. Let's make the famer a small, Eastern Washington, wheat farmer --I know one-- , and let's make the small business a bakery. (My son knows one.) When the farmer plants her crop, she doesn't know what price wheat will be come harvest time. Meanwhile, there are expenses that have to be paid, which generally has to be done with money borrowed from a bank, who is also guessing what the price of wheat will be and trying to estimate their risks in making the loan.
Jump now to the baker. After harvest time, especially a good harvest, wheat will be plentiful, and its price should be cheap. Hence, flour should be cheap and one less thing for the baker to worry about. But what will the price of flour be in the off season? Likely, it will be higher, and that's an uncertainty the baker would rather avoid.
Now enter something called a 'futures contract' which lets the farmer 'sell forward' and lock in a price. Ditto the baker. He or she can buy forward, agreeing now on a price of a commodity to be delivered at a future time. Now both have lessened some of their risks. (Yeah, there's miller involved, etc. But let's keep things simple.)
When futures contracts are used that way, they lessen price volatility, help to ensure 'fair pricing', and serve a valuable social function. The parties who use futures contracts that way are known as 'commercials" and actually don't make up a very large part of futures markets compared with 'speculators', who don't intend to take delivery of the commodities they are betting on, but whose betting creates markets that are 'liquid', and liquidity in a market enables price discovery and dampens price volatility, which again, is a socially valuable consequence.
For sure, all markets can experience excesses. Always have. Always will. But they are fairer and more efficient than their alternatives, which is a top-down, planned economy.
Where you and I would probably agree is when futures contracts begin to be applied to things like equity indexes, and financialization for its own sake displaces genuine economic activity, and that financialization is abetted by our dear central banksters and legislators in the giant Ponzi scheme the US economy has mostly become, where the top 0.01% controls 90% of all capital and power, not through activities that help make lives better for the wider population, but only serve to enrich the few.
Remedy? No reforms will ever happen if "the general public" keeps burying its collective head in the sand, refusing to understand how markets work, much less engage them. The "big boys" couldn't get away with the (often) illegal shenanigans they do if there were an informed public who was willing and able to take the other sides of their trades when it was obvious the big boys had stepped over the line, such as happened when they nakedly sold 140% of GME's float. A mostly small group of traders --though Michael Burry was among them-- called their bluff and mostly clobbered them. (The friend of the son of a fishing buddy --a "lowly' stock clerk but serious gamer-- got in early and made $198,000, which he intends to lock away in conservative investments rather than doing something stupid, like buying a fancy car.)
His success was a rare, one-time thing most of us will never be able to achieve. But I have friends --myself included-- who regularly pull more money out of market than we bring to them, and the one characteristic we all share is years effort to learn the game that often goes back to our childhoods and talk around the dinner table and humble beginnings like a passbook savings account our parents helped us set up.
Don't let all this talk of 'futures' make your eyes glaze over. Instead, think about trying to invest in some things that are probably a part of your daily life, like coffee, cocoa, wheat, soybeans, meat, and natural gas, using ETFs based on them.
Charlie
Charlie, thank you for this well-written and understandable (even for someone like me, so ignorant in the stock market) explanation. I appreciate it. I certainly never had dinnertime talks about the financial markets when I was a child!
And thanks for helping me understand that futures aren't bad in an of themselves--they are tools that can be used or abused.
Where you and I would probably agree is when futures contracts begin to be applied to things like equity indexes, and financialization for its own sake displaces genuine economic activity, and that financialization is abetted by our dear central banksters and legislators in the giant Ponzi scheme the US economy has mostly become, where the top 0.01% controls 90% of all capital and power, not through activities that help make lives better for the wider population, but only serve to enrich the few
Exactly.
Catherine,
You had asked about futures contracts and what beneficial role they might play. So I spoke to that question, not to the role that equity markets play, or the currency markets, etc., each of which has its own dynamics and offers its own benefits and suffers its own abuses. For sure, the "average" person can choose to ignore them all. But doing so means one lives in a world one doesn't understand and is subject to being disadvantaged by them who would exploit that lack of knowledge.
Markets are never completely "fair". Insiders always have 'home turf' advantage. But what has happened in the last several years is that the financial markets have become increasingly democratic, enabling small investors to participate in them --if they choose-- on a fairly level footing in terms of access to information and zero-cost executions.
Charlie
Best analysis of the GME situation I've seen. https://www.zerohedge.com/markets/monetary-policy-pushing-americans-kicking-and-screaming-risk-curve
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