Connect with us

General

Betting against meme stocks like AMC and Virgin Galactic could get you seriously burned


Another popular short with TradeZero America clients: AMC (AMC), but the movie theater chain’s shares have soared an astounding 2,350% in 2021, fueled by massive support from an army of Reddit traders who are betting that Hollywood’s triumphant box office comeback will continue.
Marin Software (MRIN), another stock embraced by the Reddit crowd, is a top short pick of TradeZero customers, too. Shares of the online advertising company have shot up more than 1,000% this year.

It just goes to show how risky it is to invest in a stock because you think its price will go down. Short sellers borrow shares and sell them with the hopes of buying the stock again at a lower price so they can pocket the difference between the price they sold at and the repurchase price.

“Investors may not be buying into the fact that some of these stocks should go up this quickly. They think that what goes up must come down and that they will run out of gas,” said Dan Pipitone, co-founder of TradeZero America.

What goes up sometimes keeps going up

The problem with this strategy is that if a stock goes up, the loss on the short position increases and multiplies the higher the price goes.

And that’s why some short sellers are giving up on their bearish bets. It’s too painful to short a stock with strong investor support in the hope that driving the stock higher will “squeeze” short sellers into submission.

“It’s one thing to be long and wrong,” said TradeZero America’s Pipitone, noting that an investor doesn’t have to take a loss on a stock until they sell the shares. “But if you are holding a stock short, it can get prohibitively expensive.”

That might be the case with GameStop (GME). The video game retailer has become the quintessential meme stock over the past year. Shorts argued that Covid-related retail shutdowns and a shift towards digital game downloads would lead to financial ruin for the company.
How AMC and GameStop became Reddit faves
But GameStop fans came in full support of the stock, arguing that changes made by prominent new investor, now GameStop’s chairman Ryan Cohen of Chewy (CHWY) fame, would turn the company around.

For now, it appears that the bulls have won as the shorts are throwing in the towel on GameStop. Shares are up about 950% in 2021 alone, soaring nearly 4,600% in the past 12 months.

According to research firm S3 Partners, GameStop has had the biggest reduction in shares being held short of any stock over the past 30 days. Airbnb and media giant ViacomCBS (VIAC) have also experienced a sizable drop in the number of shares being shorted.
Still, S3 noted that short sellers are once again targeting AMC, despite the stock’s ginormous rally this year. Short sellers are also betting big against Elon Musk’s Tesla (TSLA) as well as red hot chip company Nvidia (NVDA).

Copyright © 2020 AMSNBC News