GameStop – Short squeeze of the decade?


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Gamestop – A quick summary


Not sure how many of you have been following the story, so I’ll do a quick recap (Vox has a more detailed one if you want more info).

So GameStop is a US bricks and mortar store that sells video games.

For obvious reasons, their business has been absolutely crushed, because of (1) COVID – nobody goes to stores, and (2) Digital download of games – most new games can be purchased online.

This was fairly obvious to many people, and it got to the point where GameStop was one of the most shorted stocks around.

As at Dec 2020, short volume was a whopping 139% of shares outstanding – you read that right, short volume is higher than the amount of shares, which means a whole bunch of people are doing naked shorts (they don’t have the underlying stock).

Over the past few years, the shorts made a ton of money, because GameStop’s business has not been doing well.

In recent months, things have started to turn around, because of (1) GameStop’s new management has unveiled plans to turnaround the business (rebrand as a shared space for gamers, and also tap into ecommerce), and (2) the new console cycle has been good for physical game trading.

The Short Thesis

Last week, Citron Research (a famed short seller) unveiled his short thesis against GameStop.

He did it via a Twitter live stream, and his Twitter account promptly crashed multiple times.

He eventually got the message out on YouTube, but that only resulted in him and his family getting death threats from the online mob.

He eventually gave up and stopped commenting on GameStop because of all the hate.

The Short Squeeze

But the story doesn’t end there.

Late last week, a whole bunch of retail investors from the online forum Reddit WallStreetBets (r/WSB for those familiar with it) started coordinating to buy shares in GameStop.

And of course with such small cap, low liquidity stock with a high short volume, once it started going up, it REALLY started going up.

It got to the point where Melvin Capital (which had a big short position on GameStop) was down by $3 billion (out of a $12 billion portfolio).

It then took a $2.75 billion loan from, among others, Citadel (the famed high frequency trader). This allowed it to maintain its short position without closing it off and locking in the loss.

That was Monday, and of course the move only infuriated the online mob even more, leading to even more buying.

Giving us the 5 day chart below (includes after hours trading):

Pretty unbelievable stuff.

The closest parallel is the Volkswagen short squeeze in October 2008.

Very similar dynamics – essentially the short volume was greater than the free float, so once prices started going up, the hedge funds were forced to cover their shorts – at ANY price.

You can read more about the saga here, the hedge funds eventually lost about $30 billion then.

Who else is happy about this?

Interestingly, the Game Stop mania has also bleeded into other stocks. Europe’s most-shorted stocks saw big price swings on Wednesday.

BlackBerry soared 185% on Tuesday, and Nokia also saw a surge. The 20 small-cap Russell 2000 index companies with the biggest bearish bets against them have risen 60% on average so far this year.

BlackRock is said to have made gains of about US$2.4 billion on its approx 13% stake in GameStop.

GME Resources Limited – listed as “GME” on the Australian Securities Exchange – surged in early trading as well, because funnily enough (like Zoom), investors appeared to mistake it for GameStop. Management of the Western Australia nickel miner had no idea what was happening, until a younger family member explained.


If you’re curious, check out r/wallstreetbets to understand the thinking from the retail guys who are doing the buying. Really interesting psychology.

It’s a mix of guys who want to stick it to wall street, guys who want to rage against the system, and some guys who just want to make a quick buck.

Extracted some screenshots below for your viewing pleasure:

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What happens next?

What happens next is simple.

With close to 140% float short as at Dec 2020, my suspicion is that if the shorts are forced to cover, we haven’t seen anything yet.

This might only just be getting started.

There’s just not enough shares out there to cover the shorts, especially with retail flooding in to buy at any price.

The institutions will try to bring the price down, but it remains to be seen who will win this battle.

Options for investors are:

  • Bring out the popcorn (and watch from the sidelines) – If you just want to enjoy the show, bring out the popcorn and watch from the sidelines.
  • Buy and flip (buy shares) – You could take a punt by buying in now (via shares) and trying to flip it for a quick buck. But it really could go either way here. The big boys will try to bring the price down (margin requirements on the stock have already been raised), the small guys will try to buy it up. Hard to say who wins.
  • Buy and hold till the top (buy OTM call options) – If you really wanted to make an outrageous bet, it would be to buy deep out of the money (OTM) call options, and pray for the short squeeze of the decade. But call options are outrageously expensive now given all that is going on, so this tactic requires some good execution. 

But whatever you do, DO NOT short this stock. The downside here is unbelievable for any short, because in a real short squeeze, there’s no knowing how high the stock can go.

Not worth it unless you know exactly what you’re doing.

Now I have no deeper insight into how this is going to play out. Gut feel though, is that when this many retail investors are piling into a small cap, heavily shorted stock, expect to see big big fireworks. Probably even bigger than what we’ve seen so far.

I don’t think this is over just yet.

Has underlying market structure shifted?

It’s become increasingly obvious over the past 12 months – but the underlying market structure has shifted.

It is now very retail dominated, and their weapon of choice is call options.

The modus operandi seems to be to select a bunch of hypey stocks (eg. Snowflake, Palantir, Tesla, Nio etc), buy deep out of the money call options, and watch the money pour in when it goes up.

In the bull market that we’re in right now, this strategy has paid big dividends.

Again, don’t know how this ends, but when things get this euphoric and frothy, it almost never ends well.

But whatever the case, the presence of the call buying retail investors can no longer be ignored in this market.

As this saga shows, they have real presence in today’s markets, and collectively, they truly have the potential to make waves.

In the meantime, buckle up, and enjoy the ride! It’s going to be an amazing one.

Note: This article is a premium article that first appeared on Patron. Making it available given the unprecedented nature of this situation. If you enjoy it, do consider supporting Financial Horse and getting access to premium content!


  1. I don’t think citron got hacked. I was there for the whole time during live-streaming. Too many people from WSB was flooding citron twitter livestream hoping for citron to drive the price down so that we could buy even more for cheap.(I was one of them) So much so that the stream was so lag from the start it crashed. Twice. Afterwards he put out words that he was hacked. WSB people was so amused by this and take it as a signal to buy even more, leading to the culmination of Friday gamma squeeze. The rest are history.

  2. I was there for the whole Citron saga. There is no hacking involve. Its just a comical attempt by Andrew left (Citron Representative) to push the price down by livestream.

    It started on Wednesday when Andrew declare a livestream to lay out reasons why GameStop is worth $20 on Thursday.

    Unbeknownst to him, Thursday is Biden’s inauguration, causing him to cancel his livestream and shifted it to friday.

    When friday came, everyone on WSB was anticipating Gamestop to dip and planned to buy the “dip”. (I was one of them)

    Many mistakes were made on friday by andrew left.

    Firstly, he decided to stream on twitter instead of a proper streaming channel such as facebook/twitch. The moment he livestream, 3k people was piling up on his stream. It crashed within 17 seconds.

    Following next, people starting to realize that the video quality was absolutely shit and he was streaming it on a phone. This brought tons of doubt on how professional Citron research as a whole is. Before this, we all had the illusion where Citron research was an established and professional short analyst company. The quality of the production destroyed this illusion.

    Lastly, he decided to stream after 15 mins due to “technical difficulties”. Lo and Behold the same thing happened again with even more people piling in.

    After this, He twittered that he was hack which was meme-ed alot at his expenses. People on WSB took this as a bull signal and mass buy GME on Friday morning. Which triggers a Gamma Squeeze sending the short price higher.

    Although there was some party who harressed Andrew left family member, which i strongly condone. Many things could have been done properly by him to prevent the whole fiasco.

    Too bad i didn’t get to buy the stock on a discount 🙁

    Hope this help explaining what was happening on Friday.

  3. Hi FH,

    Very timely. The world has gone crazy but there is some method to the madness here.

    This is more speculation than investment but given that relatively small bets can actually lead to life changing returns, it may be worthwhile to buy a few lottery tickets to the game.

    It is a completely new dynamic when an Ant army can overwhelm a few elephants. Even without a leader, social media has shown that it can cause people to be coordinated around actions and this may be the case with WallStreetBets. The Ant army is doing what the hedge funds used to do by attacking positions that parties with limited resources are not able to defend. With 4.3M subscribers and growing, if everyone at WallStreetBets puts in $1000, that is already $4.3B right there. There may be 10 non-subscribers viewing for every subscriber so the amount of firepower the Ant Army can bring to the table is essentially unlimited and more than any hedge fund.

    While VW may have been the last previous big short squeeze and Gamestop is the current one, I am not sure it will take very long for the Ant army to coalesce around the next one now that a formula to do this has been found. Regulators will probably have to step in at some point but there may be a few more Gamestops before all this is over. All stocks with shorts are at risk of attack now.

    Given that hedge funds have transferred $23.6B to small investors in Gamestop in just one month and some have seen their bet of 50-100K grow to 27M, placing a limited bet one can afford to lose of say 1-2 weeks salary is not a bad idea.

    With this in mind, I would like to request that you write something on what you think could be potential next Gamestops (of course, with the big caveat that it is all very speculative and things will eventually inevitably explode.) There are an increasing number of names being bandied about on WallStreetBets from AMC, Nokia, Blackberry to Bed Bath and Beyond etc.

    As I am sure you are aware, some factors to consider would be
    1. Level of short interest – both % short and absolute amounts
    2. Level of normal trading activity
    3. Level of interest on Wallstreetbets

    There is probably a short window of days or weeks before the hedge funds finish de-risking and covering their shorts which is already happening so we will have to move fast to profit from this but over the next few days, hedge funds will continue to cover shorts so prices will likely continue to go up for the affected counters.

    • Hi CMC,

      Love your comment as always. I agree on the Ant v Elephant analogy, really unbelievable stuff. It’s like the 21st century version of George Soros breaking the Bank of England.

      Really tough to say what’s coming next though. It will require close monitoring of wsb, not to mention that such intended manipulation is completely illegal.

      For now, NOK, BB, AMC like you mentioned are all the big ones. But what would come next is super super tough to predict.

      I guess another way to do it is to pull up the list of most shorted hedge fund stocks, and just buy them all. Like you mentioned, if the hedge funds start covering, it could be a massive short squeeze across the market.

      Another opportunity could be to buy stocks in the broader market. If the hedge funds start liquidating to meet margin calls / cover shorts, that will lead to broader market weakness and could be a buy opportunity.


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