GameStop squeeze returns: How short sellers win or lose money

The GameStop squeeze on short sellers has returned, with a recent jump on the video game retailer’s stock forcing short sellers to cover their bets.

But the financial impact on short-sellers was not expected to reach the same degree as the dubbed mother of all short squeezes in 2021, fueled by retail investors on social media.

Greg Boland, chief strategy officer at Tiger Brokers New Zealand, told Markets with Madison the total short interest on the stock was about 26 per cent of its share float this year, compared with more than 100 per cent in 2021.

That remained high relative to the total S&P500 short interest of 1.8 per cent, he said.

“I don’t think it’s necessarily hedge funds, it could be retail investors who have shorted it,” Boland said.

“I think in the original thing it was to stick it to the hedge funds, definitely.”

He explained that short sellers made money if their bet that the price of a stock would fall, eventuated. They lost money if the price increased as they were required to pay to cover their position.

“It’s a zero sum game. [For] every winner, there’s a loser, and prices will go up and down, and you can make money on the downside as much as you can on the upside.”

Short selling was done through stock options, a popular form of derivative, Boland said.

Watch today’s episode of Markets with Madison above to see how short sellers get squeezed, and if margin calls caused by meme stocks will ever put them off.

GameStop’s share price rose from a year to date low of US$10 in April, to a year to date high of US$45.78 in May, after an illustrated image was posted from The Roaring Kitty’s X account for the first time in years, signaling to investors he was back in the trading game.

According to S3 Partners, the jump in the stock in May reportedly caused a marked-to-market loss to short sellers of almost US$1 billion.

GameStop’s share price had since dropped to US$31.57, representing an 89 per cent increase this year.

Other US stocks with a large degree of short interest included solar power company SunPower Corp., with 88 per cent of its share float short sold, Beyond Meat with 47 per cent short sold and Novavax with 33 per cent.

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Disclaimer: The information provided in this programme is of a general nature, and is not intended to be personalised financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances.

Madison Reidy is the host of the NZ Herald’s investment show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.