---
title: "Review of the Battle of Forcing Shorts, Retail Investors Triggered a Billion-dollar Hedge Fund Explosion"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/107419504.md"
description: "This article, compiled from Three Thoughts Options, reviews the GME short squeeze battle in 2021. In the past few days (January 27, 2021), both Chinese and English media have brought a big news in the financial world. That is the game station $GME, where retail investors are fighting against hedge funds! Under the explosive buying pressure from retail investors, not only did the stock price of GME skyrocket, but it also caused a blowout in the positions of Wall Street's star hedge funds. Mainstream media as well as self-media have reported the basic facts, but we hope to provide everyone with an interpretation from the perspective of professional options traders, explaining why a few ants can bring down the elephant of Wall Street. First of all, let's start with the stock GME. In just two or three weeks at the beginning of 2021, GME surged from $5 to $120. Source: Long Port1. The turning point of a junk stock GME, a physical game store, has been on a downward trend in recent years. In March last year, the stock price even fell below $3. It was undoubtedly a junk stock. However, on January 11th this year, a turning point occurred. Ryan Cohen, the founder of the former pet e-commerce company Chewy, purchased a large amount of GameStop stock and became the second largest shareholder of the company. Who is Ryan Cohen? In 2011, at the age of 25, Ryan created Chewy, a vertical online retailer of pet food and supplies. By 2016, Chewy had already become the largest online pet supplies store in the United States."
datetime: "2024-02-05T11:32:26.000Z"
locales:
  - [zh-CN](https://longbridge.com/zh-CN/news/107419504.md)
  - [en](https://longbridge.com/en/news/107419504.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/107419504.md)
---

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# Review of the Battle of Forcing Shorts, Retail Investors Triggered a Billion-dollar Hedge Fund Explosion

This article, compiled from Three Thoughts Options, reviews the GME short squeeze battle in 2021.

In the past few days (January 27, 2021), both Chinese and English media have brought a big news in the financial world. That is the game station $GME, where retail investors are fighting against hedge funds! Under the explosive force of retail investors, not only did the GME stock price skyrocket, but it also caused the hedge funds on Wall Street to suffer massive losses.

Mainstream media as well as self-media have reported the basic facts, but we hope to provide everyone with an interpretation from the perspective of professional options traders, explaining why a few ants can bring down the elephant on Wall Street. First, let's start with the story of the GME stock.

In early 2021, within just two to three weeks, GME surged from $5 to $120.

## **1\. The Turning Point of a "Trash" Stock**

GME, a physical game store, has been on a downward trend in recent years, with its stock price falling below $3 in March last year. It had become a "trash" stock. However, on January 11 this year, a turning point occurred. Ryan Cohen, the founder of the former pet e-commerce company Chewy, bought a large amount of GameStop stock in 2020 and became the company's second-largest shareholder.

Who is Ryan Cohen? In 2011, at the age of 25, Ryan founded Chewy, a vertical online retailer of pet food and supplies. By 2016, Chewy had become the largest online pet supply store in the United States. In 2017, the largest pet store in the United States acquired Chewy for $3.35 billion, making it the largest e-commerce acquisition in history. After achieving his small goal, Ryan invested heavily in 6.2 million shares of Apple stock, becoming the largest individual investor in Apple.

Last November, this aggressive investor wrote a letter to the GameStop board, urging them to make a strategic transformation as soon as possible and turn the company into the "Amazon of the gaming industry." We don't know what happened during that time, but on January 11 this year, Ryan, along with two comrades, entered the GameStop board.

Based on Ryan's success with Chewy, fans and shareholders believed that he had the ability to transform this struggling physical store into the Netflix or Amazon of the gaming industry. This is why the subsequent surge and the long and short battle occurred.

## **2\. Citron's Exit**

On January 12, the GameStop stock price had a mediocre response, but it started to jump on January 13 and continued to rise. On January 19, when the stock price was still around $40, Citron couldn't sit still. We don't know if they had already accumulated a large number of short positions, but they decided to publicly "educate" retail investors, asking, "Why is GameStop only worth $20?"Surprisingly, individual investors not only did not back down, but became even more courageous. Led by Wallstreetbets (WSB) on Reddit, these individual investors openly encouraged others to go long and rallied the masses to squeeze the short sellers, driving up the stock price and making substantial profits. Under their influence, the stock price rose by $25 in just a few days.

It can be described as an organized and large-scale "financial violence". Andrew Left from Citron Research publicly announced that he would no longer express any opinions about GameStop and claimed that the frenzied internet users had started harassing his family. He also stated that he would submit evidence to the SEC.

After Citron's announcement, individual investors rushed into the market like they were injected with chicken blood, pushing the stock price to nearly $75 on the same day.

The potential losses from shorting stocks theoretically have no limit.

What's different this time is that in addition to buying a large number of stocks to drive up the price, individual investors also bought a large number of call options when squeezing the short sellers. The trading volume of options in the past few days has far exceeded the total volume of last year.

The continuously rising stock price forced market makers with a large negative gamma to keep buying stocks to hedge, creating a positive feedback loop that harmed market makers with a large negative gamma.

The frenzy of individual investors, who needed to buy stocks to hedge against market makers with negative gamma, combined with the already limited liquidity and the soaring borrowing costs, formed a terrifying triple threat.

Last Friday, the highest strike price for any expiration date of GME options was $60. The call options with a strike price of $60 expiring on the 29th of this week were priced at around $10 last Friday. These individual investors chose the most out-of-the-money options (with the highest leverage) to buy. For example, an individual investor with only $6,000 could only buy 100 shares of the stock, but by buying 6 options contracts, they controlled 600 shares (6 \* 100, as each US stock options contract represents 100 shares of stock).

This is why we say that options are the main battlefield.The call option with a strike price of 60 has the largest open interest in the market. Normally, this kind of strategy wouldn't have a significant impact when the stock itself is not very volatile. However, for stocks like GME that have daily fluctuations of over 50%, it is a tough situation for market makers.

Furthermore, the closing price on Friday was 65, which is rare as it pushed the stock price above all the option exercise prices. This situation is even worse than being on the opposite side of SoftBank!

Because these market makers with negative gamma no longer have any hedging tools, as theoretically there is no limit to the increase in stock price. If the stock jumps significantly on Monday, the negative gamma exposure held by the market makers could potentially bankrupt a medium-sized market maker.

![Image](https://pub.pbkrs.com/uploads/2024/616e1475b59f22319bdd30e42677074b?x-oss-process=style/lg)

The first unfortunate victim in this event was Melvin Capital, which suffered heavy losses in its short positions last week and had to be injected with $2.75 billion by its peers Citadel and Point72 to stay afloat. At the beginning of the year, this hedge fund managed $12.5 billion, and GME was one of its many short positions. It was precisely because of the significant losses in the short position of GME that Melvin Capital experienced a sharp decline of 30% in the first three weeks of January.

![Image](https://pub.pbkrs.com/uploads/2024/5fab410edb2a222a20f41d41b00efd43?x-oss-process=style/lg)

## **4\. Relentless Pursuit**

Originally, it was thought that after the retail investors pushed the stock price to 65 and squeezed the short sellers, the story would end. What the entire market didn't expect was that this was just the beginning.

Returning to the GME battlefield, on Monday, January 25th, the exchange added many high strike prices based on the closing price. The highest strike price increased from 60 to 115. For market makers, the situation became slightly more favorable as there were more hedging opportunities.

However, at the opening on Monday, the stock price jumped directly to $95, nearly 50% higher than the Friday closing price. This sudden surge was a heavy blow to the market makers. This is because for market makers with a negative gamma exposure, they are most afraid of this kind of surge (gap risk). The surge not only caused losses for the market makers but also increased a large negative delta exposure, forcing the market makers to continue buying stocks to hedge.

At the same time, retail investors started another round of frenzy buying of call options. This time, the new target was the call option with the highest strike price of 115.

Wallstreetbets continued to fuel the retail investors. "Take down the short sellers, forget about the fundamentals!" Why was he so confident? This is because the short position of GME increased during this period!

![Image](https://pub.pbkrs.com/uploads/2024/f7c279101a293d469a78689ab449ea77?x-oss-process=style/lg)In addition to boosting morale, WSB also showed off their own accounts, telling their followers that they can do the same. There are also many individual investors on Reddit who have shared their gains, ranging from tens of thousands to millions, suddenly giving it a taste of the cryptocurrency market.

The image below shows the closing price on Tuesday, with WSB making a profit of $17 million!

![Image](https://pub.pbkrs.com/uploads/2024/31bca15fce09fad59cadd10df4247ed8?x-oss-process=style/lg)

The exchanges were also unprepared for this showdown between individual investors and institutions. Within an hour of the market opening on the 25th, the stock price rose to 120, once again surpassing the strike price of all options.

![Image](https://pub.pbkrs.com/uploads/2024/ae2cbd04802a550b85258ef7131e4656?x-oss-process=style/lg)

From the chart below, we can see that the frenzy of trading by individual investors has led to a trading volume of 112,000 call options at the strike price of 115 expiring this week. Even the sky-high prices set by market makers for options cannot stop the enthusiasm of individual investors buying them.

![Image](https://pub.pbkrs.com/uploads/2024/5d8dde8b035224dfd6d602f8fced9d9e?x-oss-process=style/lg)

**At this point, the options trading for GME has become irrational. The only thing on the minds of these frenzied individual investors is to squeeze out all the short positions in this stock.**

## **5\. Going Crazy**

On Tuesday, the exchanges added more strike prices, with the highest being 200. With the current open interest, stock price, and more options available for trading, options market makers have more room to maneuver, and many individual investors and institutions are likely to profit from this absurd showdown, increasing the number of options sellers.

In the first half, the stock price fluctuated between 75 and 100, seemingly ending the madness. But in the second half, violent surges began again, with the call options at the highest strike price of 200 becoming the target.

![Image](https://pub.pbkrs.com/uploads/2024/250973bc9e30039326ec5cd86a74840f?x-oss-process=style/lg)

At the closing price of $148 on Tuesday, the price of a straddle option with a strike price of 200 expiring on February 19 reached $150. This means that market makers are telling retail investors that in order to profit from buying this straddle option, the stock price of GME must be below $50 or above $350 on the expiration date of February 19.

## **6\. After-hours on the 26th**

After-hours trading saw GME drop from $148 to $214. This battle between individual investors and institutions has just begun. As spectators, we are eager to see if the institutional giants will unite and counterattack after WSB's blatant provocation, pushing the stock price down. After all, the number of these crazy individual investors is limited, and their wallets are also limited. We will continue to follow and report on how this farce will end.Finally, WSB also wrote a lengthy open letter to CNBC, accusing the hedge fund elites who bet against them of manipulating the market through CNBC to whitewash their actions. They portrayed themselves as a peasant uprising, aiming to overthrow the capitalist class.

![Image](https://pub.pbkrs.com/uploads/2024/fcb95dc27df38db1dab74ac2c7933268?x-oss-process=style/lg)

![Image](https://pub.pbkrs.com/uploads/2024/def67cc2767e5a6e6ddf79db0b623c3d?x-oss-process=style/lg)

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