By Stephen Culp and Julien Ponthus
NEW YORK (Reuters) – Shares of U.S. videogame retailer GameStop skyrocketed by 144% on Monday as short sellers scrambled to cover their positions in the stock, which then pared gains in a roller coaster session that featured nine trading halts for volatility.
Options activity also surged in the stock, which had gained 245% so far this year as of Friday’s close, was last up 19.7% at $77.81.
Short sellers had bet against the stock because they viewed the company’s retail business model as outdated. But GameStop shares began to rise as investors cheered the video game retailer’s announcement on Jan. 11 about appointments to its board to double down on digital sales.
As the short sellers rushed to cover their positions and avoid further losses, the buying frenzy enticed retail investors to pile on in hopes of riding the stock’s momentum higher.
“Many traders leveraged positions betting the stock would go down and as it became a hot topic on social media and saw artificial demand created among short sellers, there was fuel added to the fire,” said Jake Wujastyk, chief market analyst at TrendSpider, a technical analysis software company for traders.
“Traders were being shopped out of their short positions and forced to buy back and a significant amount of artificial demand was created,” Wujastyk added.
Short sellers typically borrow and sell shares they expect will fall, hoping to buy them back at a lower price, pay back the loan and pocket the difference.
Users of social media circulated memes mocking the losing bets by intuitional traders and the gains made by “mom and pop” retail traders those on Wall Street have long derided as “dumb money.”
Over a quarter of all posts on three main Reddit investing groups last Friday were about Gamestop, compared to an average of about 1% in November, according to a Thomson Reuters analysis.
Retail traders “making a complete mockery of Wall Street and sophisticated institutional investors is absolutely hilarious,” wrote Rob Paone, founder of Proof of Talent, a blockchain recruiting firm.
Art Hogan, chief market strategist at National Securities in New York also appreciated the absurdity.
“You know it’s not going to end well but while it is happening it just becomes this sideshow where people just sit back in disbelief,” Hogan said.
The short betting was evident with 100% of the shares available to borrow to speculate against the company already out on loan, according to FIS’ Astec analytics data as of Friday.
“Over the last seven days we saw shares shorted increase by +769 thousand shares, worth $50 million, an increase of +1.08% as its stock price rose +83%,” according to Ihor Dusaniwksy, managing director at S3 Partners, a financial data, analytics and services firm.
Last week, short-seller Citron Research said the stock would be “back to $20 fast”.
Citron did not respond to a request for comment.
Volume has also surged in GameStop options, hitting a record of 2.13 million contracts on Friday. On Monday, about 1.25 million GameStop options contracts had traded as of 3:04 pm E.T. (2004 GMT), about four times expected volume, according to Trade Alert. Given the surge in GameStop shares, expectations for volatility have likewise climbed. Based upon Trade Alert data, options are now pricing in an average move of about 22% over the next 30 days.
Among the eight analysts who cover the stock, four rate it “hold” and the rest recommend “sell.” The median price target is $12.50, an ~85% discount to current levels, according to Refinitiv.
GameStop did not respond to a request for comment.
(Additional reporting by April Joyner and John McCrank in New York, Michelle Price in Washington, Julien Ponthus and Thyagaraju Adinarayan in London; Editing by Alden Bentley and David Gregorio)
