Who and what losses will incur due to the orgy with GameStop shares

How a GameStop pullback could hurt some investors

Any pullback in GameStop Corp shares could potentially lead to losses for some investors. The risk group may include people who bought stocks at recent highs or on margin, as well as those who sell options.

ameStop is pictured in the Manhattan area of ​​New York City, NY, USA 


GameStop, which experienced an impressive rally, decreased 31% on Monday to close at $225, 53% below its peak on January 28 of $483.


Which investors could have been hurt?


Analysts are afraid that new or inexperienced investors might face losses by buying stocks at their peak.


Those who purchased "on the margin" will be particularly vulnerable to using borrowed money from brokers to buy additional shares.


This strategic strategy can increase profits if stock prices increase, but it can also increase losses on the way down, particularly when brokers make "collateral demands," which demand that customers deposit funds under the threat of forced sales in order to maintain the required account level.


Brokers do not have to notify customers of insufficient margin shares when they sell "though most of them do so with trivial politeness," as is common in the financial industry.


Riley Adams,31,the financial analyst with a millennial-oriented financial blog, youngandtheinvested.com, said that "they've definitely been injured when investors buy margins at the end of the party."


Thomas Peterffy, Chairman of Interactive Brokers, estimates that approximately half of the 1,2 million accounts on their platform are marginal. On a typical day, he says, there are thousands of requests for depositing funds, and the number was increased last week.Peterffy said that about 27,000 brokerage accounts had some position on GomeStock, with traders closing them to GameStock holding many of the liquidated positions.


The brokerage representatives of TD Ameritrade and Robinhood refused to provide details of how many GameStop customers could trade on a margin. A spokesman for Schwab did not answer any questions.


But Robinhood has limited the buying of shares, thereby reducing the risk for investors on this platform.


What does this mean for traders of options?


The stock options of GameStop helped spark a dizzying rally in stocks. Investors are now wondering how far they could exacerbate the downturn.


Some market observers say Gamma Squeeze, i.e. when market makers first sold many call options to investors and then started locking up losses by purchasing the assets at the bottom, the stock in itself, played a key role behind the sharp rise of GameStop.


In theory, a sharp drop in inventory could lead these same market managers to divest their stocks, possibly speeding up the decline. That is exactly what happened last September, after investors sold purchase options from technology companies such as Amazon.com Inc. and Alphabet Inc.The decline in these positions contributed to the sharp decline in the Nasdaq.


Christopher Murphy, co-head of Susquehanna Financial Group's derivatives strategy, notes that there is currently little open interest in GameStop colas as a number of buyers of these contracts closed on the same day.


A large number of contracts remain open among GameStop options, according to Trade Alert. A further significant risk lies with those market participants who have sold options believing that GameStop shares are not below a certain level. This risk will occur if securities fall well under the level of the strike.


But since option prices explain the huge stock changes, "people who have short choices may not lose as much as they believe," said Murphy. According to Trade Alert, overall, GameStop prices for day options now amount to around 27% for contracts that expire within the next month, up from 8.5% at the beginning of January.


Investors, on the other hand, who purchased call options in the hope that GameStop stock growth could lose all of their stocks if the price does not attain the target level (strike) before the options expire.


What does seller trading mean?


The fall in GameStop shares will result in sellers of short shares (selling shares of non-owned shares-approx. ProFinance.ru) seeking money by finding "attractive exit points," says Igor Dushanovsky, managing director of S3 Partners for predictive analysis. Short sellers sell leveraged stocks in the expectation that prices will drop and the stock will be purchased at a lower price.


At the same time, a fall in prices could attract new brief positions that would benefit from any price drop, Dushanivsky said. According to Dushanivsky, over the last week, the number of short shares of GameStop has decreased by more than half as short shares were closed.

Dushanivsky said that if new shorts increase as the stock falls, sales will become even worse as long as they try to leave their position for profit.


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