Sometimes real life gets even crazier than BILLIONS. The Gamestop stock trade looks like one of the biggest short squeezes ever. It claimed one casualty: hedge fund Melvin Capital which had to be bailed out by other hedge funds.
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We use a scene of Season 1 Episode 4 (Short Squeeze) to explain what is happening with Gamestop and Melvin Capital.
in alternative investments and hedge funds explored in this episode:
FULL ANALYSIS - Episode recorded on 25 Jan 21
If you’ve watched Billions you know that Axe Capital loves to short.
We see it in the first episode S1E1 Krakow.
And with the ice juice Ipo: Golden Frog
But this is not an easy game to play.
In season 1 episode 4 Axe got into a short of a company called Crossco. A friend overheard he was shorting and followed him.
Axe has to dig deep to hold the position, after the shares he borrowed to short get recalled.
His friend though is burnt or rather squeezed as in short squeezed.
That summarizes a trade that happened this week: Gamestop vs Melvin Capital
GameStop has soared as retail investors, and in particular, a group called wallstreetbets on Reddit, have piled into the stock.
There’s no clear rationale behind the rise, it looks like it’s driven by amateurs. It has attracted some famous short-sellers like Citron Capital.
There is a huge short interest (number of shares sold short by the average daily trading volume) on the stock.
Melvin Capital's short positions against GameStop have contributed to losses of 30% through Friday,
When the shorts are squeezed it makes the stock go up
To short a stock you need to borrow it and you need to give it back. If the price moves up and you need to close the position It doesn’t matter if you are right in the long term. you may have to close it because your risk is too high or the lender of the stock needs it back.
Shorts need to buy more as prices go up, and by doing so make the price go higher, a short squeeze happens.
That’s what happens to Axe’s Friend. Axe bailed him out.
It’s happening to Melvin Capital, too. Fellow HFs Citadel and POint72 are investing 2.75B in Melvin Capital to bail them out.
But it will surely come at a prize… (in Billions the friend is left stranded as the rest of the crew flies back).
ABOUT THE BILLIONS SERIES
Emmy® and Golden Globe® winners Paul Giamatti and Damian Lewis star in a complex drama about power politics in the world of New York high finance. Shrewd, savvy U.S. Attorney Chuck Rhoades (Giamatti) and the brilliant, ambitious hedge fund king Bobby "Axe" Axelrod (Lewis) are on an explosive collision course, with each using all of his considerable smarts, power and influence to outmanoeuvre the other. The stakes are in the billions in this timely, provocative series.
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