Short selling has been in the news a lot the past few months, and there’s plenty of money to be made during a short squeeze — if you have the know-how. And there’s a simple way to profit that’s not nearly as complicated as many people believe.
But more on that later…
Easily the biggest name amid the short-selling craze is GameStop Inc. (NYSE: GME), which reported earnings after Tuesday’s close. The GameStop earnings call wasn’t bad, missing estimates by a penny per share. Though, revenue also fell short of expectations, coming in at $2.12 billion vs. $2.21 billion projected.
Shares bounced around and fell as much as 35% by Wednesday’s closing bell.
When companies report earnings, there are three things you want to pay attention to:
So GameStop missed estimates, but it also announced former Amazon and Google executive Jenna Owens will be its new chief operating officer, which is big, great news. But there was also a third announcement that is largely behind shares falling after the GameStop earnings call: a secondary stock offering.
This adds shares to the market, diluting the value of existing shares, so the company can raise money. In and of itself, a secondary offering isn’t a bad thing. But if there are too many secondary offerings in a short amount of time, that’s when things get dicey.
But today’s GME action is short term. If you look at GameStop mid to longer term, you see it’s a classic example of what a short squeeze looks like.
GameStop’s stock has been championed by the subreddit WallStreetBets, as we’ve covered in great detail the past few months. And this has started somewhat of a short squeeze mania, with everyone looking for the next GameStop to score big profits.
In the simplest terms, a short squeeze happens when there is high short interest in a stock. That simply means a lot of people are short the stock. When you’re short a stock, you sell borrowed shares first, and then you profit if the stock goes down.
If instead the stock goes up, you lose money. So it’s the exact opposite of buying a stock, which of course you make money when the share price goes up.
When you have a lot of people who are short a stock and the price keeps rising, they have to exit those shorts. And how do they exit? By buying the stock back — at the now higher price.
When you buy a stock and it goes to zero, that’s it. But when you short a stock, it can rise to infinity and beyond — so long as the share price keeps rising! So there’s no limit to the amount of money you can lose if you’re selling a stock short…
BUT… if you can spot a squeeze before it happens, you can buy shares on the cheap and sell after it rockets higher — buy low, sell high. That’s trading 101!
Check out my short video and let’s talk about GameStop’s earnings call, as well as how to play short squeezes for big profits. Be sure to leave your questions or comments below!
And as always, please like and subscribe to our YouTube channel and podcast, “Smart Money Circle,” where I interview some of the most brilliant minds in the business. You can also follow me on Twitter, and read more of my thoughts on the market at WealthPress and on Forbes, where I’m also a contributor.
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