GameStop rally fizzles; shares still register 151% weekly gain
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[February 27, 2021] By
Aaron Saldanha and David Randall
(Reuters) - GameStop Corp closed 6% lower
on Friday as an early rally fizzled but the stock finished the week 151%
higher in a renewed surge that left analysts puzzled.
The video game retailer's shares closed at $101.74 after retreating from
a session high of $142.90. The weekly rocket ride higher came despite a
broader market selloff that sent the benchmark S&P 500 <.SPX> down 2.5%
over the same time.
Analysts have struggled to find a clear explanation, and some were
skeptical the rally would have legs.
"You might be able to make some quick trading money and it could be a
lot of money, but in the end, it's the greater fool theory," said Eric
Diton, president and managing director at The Wealth Alliance in New
York. The theory refers to buying stocks that are over-valued,
anticipating a "greater fool" will buy them later at a higher price.
Analysts mostly ruled out a short squeeze like the one that fueled
GameStop's rally in January, when individual investors using Robinhood
and other apps punished hedge funds that had bet against the stock,
forcing them to unwind short positions. Many GameStop buyers took their
cues from online investment forums on Reddit and elsewhere.
Short interest accounted for 28.4% of the float on Thursday, compared
with a peak of 142% in early January, according to S3 Partners.
Options market activity in GameStop, which has returned to the top of
the list in a social media-driven retail trading frenzy, suggested
investors were betting on higher prices, higher volatility, or both.
Refinitiv data showed retail investors have been buying deep
out-of-the-money call options, which have contract prices to buy far
higher than the current stock price.
Many of those option contracts were set to expire on Friday, meaning
handsome gains for those who bet on a further rise in GameStop's stock
price.
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People enter a GameStop store during "Black Friday" sales in Carle
Place, New York November 25, 2011. REUTERS/Shannon Stapleton/File
Photo
Call options, profitable for holders if GameStop shares hit $200 and $800 this
week, have been particularly heavily traded, the data showed. GameStop's stock
traded this week as high as $184.54 on Thursday, far below the $483 intraday
high it hit in January.
"The actors are looking to take advantage of everything they can to maximize
their impact and the timing is important," said David Trainer, chief executive
officer of investment research firm New Constructs. "The options expiration will
contribute to their strategy on how to push the stock as much as they can and
maximize their profits."
Bots on major social media websites have been hyping GameStop and other "meme
stocks," although the extent to which they influenced prices was unclear,
according to analysis by Massachusetts-based cyber security company PiiQ Media.
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The U.S. Securities and Exchange Commission (SEC) on Friday suspended trading in
15 companies because of "questionable trading and social media activity."
GameStop was not among them.
The 15 companies were in addition to six stocks it recently suspended due to
suspicious social media activity.
Robinhood said it has received inquiries from regulators about temporary trading
curbs it imposed during a wild rally in shorted stocks earlier this year.
Other Reddit favorites were also lower on Friday, with cinema operator AMC
Entertainment down 3.4%, headphone maker Koss off 22.4% and marijuana company
Sundial Growers down 2.9%.
(Reporting by Aaron Saldanha in Bengaluru; additional reporting by Caroline
Valetkevitch in New York, and Devik Jain and Sruthi Shankar; Writing by David
Randall; Editing by Alden Bentley, Shinjini Ganguli, Anil D'Silva, Dan Grebler
and David Gregorio)
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