re: #82 Targetpractice

Reading through Fark and it’s just amazing how many people don’t quite get the motivation of the GS short squeeze. They’re either screaming that it’s a “pump and dump” and the SEC should get involved to shut it down or they’re sneering that the hedge funds will manage to avoid bankruptcy by borrowing enough to cover their losses while all those who participated will be left with “worthless stock.”

These must be the sort of folks who were left practically catatonic by the end of The Dark Knight, totally unable to understand why the Joker burned those pallets of money when he could have invested it all and lived like a king instead.

One thing that people should understand here, is that shorting stocks has theoretically unlimited downside. If you short stock when the price is $10/share, and it goes up to $100/share, you lose $90/share when you close out and buy the stock. If it goes up to $1000/share, you lose $990/share. If the stock goes to zero, however, you make the maximum of $10/share.

You’re also borrowing the shares from somebody (a brokerage), who by law needs collateral, or you as the short can just shrug, go bankrupt, and walk away without buying back the stock. When the price of the stock goes up, the brokerage will, by law, demand more collateral (a margin call). So now you have to keep feeding cash to the brokerage to keep your short position open (otherwise, if you miss it the brokerage will force-buy the stock using the collateral and close you out). I’m surprised that there can be more than 100% of the outstanding stock shorted, but I’d welcome a finance guy to explain that part.

So it’s a dangerous game with limited upside and unlimited downside, where when things go bad you have to feed precious cash into the beast if things start going bad (that you borrowed? uh oh). These hedgies thought they were smarter and ballsier than everyone else, got fucked, and now are whining about how everyone is so mean to them and the government should bail them out. Sad!