If you thought investing during the coronavirus disease 2019 (COVID-19) crash was interesting, 2021 has been one big hold-my-beer moment. For much of the past three weeks, Wall Street and the investment community have stood back and marveled at the Reddit-fueled retail-investor rally, which has led to historic volatility in brand-name stocks like GameStop (NYSE: GME) and AMC Entertainment (NYSE: AMC). In January alone, GameStop and AMC logged respective gains of more than 1,600% and 500%.
Without digging too far into the weeds, retail investors on Reddit’s WallStreetBets chatroom agreed to band together to buy into stocks that were heavily sold short. Short-sellers are investors (mostly hedge funds and investment banks) who make money when the price of a security falls. Gains are capped at 100%, but losses are unlimited for short-sellers.
By purchasing shares and out-of-the-money calls on GameStop and AMC, these retail investors triggered a short squeeze. Essentially, it sent short-sellers scurrying for the exit all at once, causing both companies’ share prices to spike higher.