The slightly drunk team talks about the soon-to-be-motion picture topic, GameStop. Find out who is a true believer in the movement, who is doubtful of the meme stock’s future, and what the fuck is going on with this mall retailer stock.

How to understand what’s going on…

Buying A Stock

I think the price of Stock X is going to go UP.

I buy Stock X for $10. The price goes up to $12. I sell the stock and keep the $2 profit.

Shorting A Stock

I think the price of Stock X is going to go DOWN.

I find someone who already owns Stock X and I ask to borrow it temporarily. I sell the borrowed stock to someone else for $10. The price drops to $8. I re-purchase the stock and return it to the original owner.

When I sold the borrowed stock, I received $10. It only cost me $8 to get it back so I made $2 profit.

How Much Money Can I Lose When Buying or Shorting Stocks?

If I BUY Stock X for $10, the most I can lose is $10… if the stock drops all the way to $0.

If I SHORT Stock X at $10 hoping it will drop in price, but the price goes up instead… then I can lose an INFINITE amount of money based on just how high the price can go. For example:

I sold the borrowed stock at $10.

If the price jumps up to $12 and I have to buy the stock to return it to its owner, I’ve lost $2.

If the price jumps up to $1000 and I have to buy the stock to return it to its owner, I’ve lost $990.

Theoretically, there is no limit on how high a stock price can go. So there is also no limit on the amount of money I can lose on a Short if the price continues to rise.

Short Squeeze

Now we’re getting into the fun stuff!

Let’s say that a lot of investors think the price of Stock X will go down, so they all Short the stock (sell borrowed stocks at what they think is a high price).

If the price of Stock X shoots up, some of those investors will jump into the market to re-purchase the borrowed stocks in order to cut their losses. This makes demand for Stock X go up and also causes the price of Stock X to shoot up even higher.

As the price rises higher, more and more Short investors will hit the point where they need to cut their losses. So they buy the borrowed stocks back and drive the price up in a beautiful feedback loop.

Short Squeezes are most likely to happen on stocks for a particular company that is heavily shorted because, if the price goes up, a lot of short investors will feel that pressure and contribute to the rising price feedback loop.

Call Option

At the most basic level, when you buy a Call Option, you are paying a small amount of money upfront for the option to buy Stock X at a certain price in the future.

Today Stock X is $10. If I think Stock X is going to increase to $15 over the next month, I could buy a Call Option that will give me the option to buy the stock anytime in the next month for the price I pick in the call option, let’s say $11.

I think Stock X is going to increase to $15 over the next month.

I buy a Call Option that gives me the option to buy Stock X for $11 at any time during the next month. I pay $0.50 for the Call Option and that money is gone whether or not I decide to purchase Stock X during the next month.

Three weeks later, Stock X shoots up to $15.