Dubai resident Akshay Nair made a profit of $65,000 in one week by trading in GameStop shares. What protected Mr Nair from the stock's recent volatility was a hedge he purchased to save him from steep market losses.
After reading about the trading frenzy on Reddit's WallStreetBets forum and other market reports, the 35-year-old Indian expat last week bought around 500 shares of the Texas-based video game retailer when it was trading at $84.
He invested in tranches with an initial amount of $10,000, while his overall investment in GameStop at one point last week was $50,000. As the stock price went up, he sold the shares and started booking profits.
"Once the stock price went up too much and reports claimed it was overhyped, I took a hedge," the senior investment consultant told The National.
"I bought a few puts worth $16 last week on Interactive Brokers. That would protect me if the stock fell below $90. On Monday, the stock tumbled, so the protection made me money.”
GameStop, which has been the poster child for Redditors looking to squeeze short sellers, fell 60 per cent on Tuesday and eased another 5 per cent in after-hours trading, with shares closing below $100 for the first time in a week. Several other Reddit favourites, including movie theatre chain AMC Entertainment Holdings, also tumbled. GameStop shares erased more than $27 billion in market value after peaking at $483 a share last week.
Mr Nair has since exited the hedge and feels he is lucky to have made a profit when GameStop stock was both rising and dropping. However, he bought another 100 shares in GameStop for $94 each on Tuesday.
“I have re-invested $10,000, which is only a part of my profits," said Mr Nair, whose confidence grew when his bets paid off last week.
"I start slow and build up when I start making profits. I also take a hedge after a particular period. If I am in profit, I first remove my capital and then play around with the profits.” He also bought shares in AMC, Nokia and BlackBerry, investing $5,000 to $6,000 in each stock.
“I am willing to take some risk and hold onto these shorted stocks for the next few days to see where they go. I only hedge when my position size increases,” he added.
Extremely high levels of short interest drove retail investors to bid up shares in GameStop and AMC. At one point, short interest in GameStop reached about 150 per cent of the equity float, Vijay Valecha, chief investment officer at Century Financial, said.
“It was the perfect candidate for a short squeeze, a phenomenon which occurs when there is a lack of supply and an excess demand for the stock due to short-sellers covering or liquidating their positions. Once the number of buyers acquired a perfect mass, the stocks just took off,” Mr Valecha added.
However, the lack of new buying and hedge funds covering their short positions drove the share prices of these companies down.
Frenzied trading always tends to end up in tears as the opportunity window opens and closes and those caught at the top are generally unsophisticated traders who end up paying the price when the stock crashes, according to Stephen Innes, chief global market strategist at Axi.
However, the general market consensus is that the GameStop short-squeeze story is coming to an end.
“The Reddit WallStreetBets story showed us that there is power in unity and a similar event could happen to other heavily shorted stocks if traders stick together and act in perfect collaboration as they did for GameStop and AMC Entertainments,” Ipek Ozkardeskaya, senior analyst with Swissquote Bank, said. “But the slightest misstep would trigger chaos.”
The GameStop trading mania has taught investors that their portfolios should be managed well so that a single trade loss will not materially affect them, Mr Valecha said.
“The news of GameStop underscored the fundamental misunderstanding that most people have about stock market investment," Stuart Ritchie, director of wealth advice at AES, said.
"The golden rule of investing is don’t panic. When you have complete faith in your strategy and portfolio, nothing can sway you. Not the news, politics or pandemics.”