Monday Reversal Hurts New GameStop Investors

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A shopper wearing a protective mask exits a GameStop store in Herald Square area in Manhattan. Gabriela Bhaskar/Bloomberg

GameStop, the videogame retailer that was abandoned by most investors years ago, has been the hottest story in the stock market over the past few days.

Retail traders, often using extremely bullish options bets, have helped propel the stock. Shares jumped as high as $159 on Monday, meaning they had more than quadrupled in just the past 10 days. But that momentum shifted later in the morning. Around 2:30 p.m., the stock was up a mere 27%, to nearly $83.

As can happen with mania-induced trades, a lot of the new money in the stock evaporated in a hurry.

While GameStop (ticker: GME) investors who had been holding the stock before the weekend benefited from the gain, most people who bought in on Monday fared poorly. The volume-weighted average price of the stock as of early Monday afternoon was $104, according to Steve Sosnick, the chief strategist at Interactive Brokers.

“I got to believe there’s a lot of people losing money today,” Sosnick said.

The volume-weighted average price takes into account trading volume during the day to determine the average price a stock traded at.

More than 120 million shares had been traded by midday, more than six times as many as on an average full day.

Much of the coverage about the GameStop surge has been about short-sellers losing money — and they certainly have been destroyed during the rally. Short-sellers had borrowed more than 100% of the float as of last week, and as the stock rose they got squeezed and were forced to buy at escalating prices.

But new buyers are taking enormous risks, because even if the daily averages look positive, the volatility is putting many of them in a deep hole, he noted.

“The odds are if you bought today, you’re down,” Sosnick said. “The average share that was bought today is down by about 30%. These are incredibly treacherous situations to trade in. And that’s why my comment to the readers would be if they’re reading about this now, watch it with amusement. But now is not the time to jump into this game.”

The boisterous traders on Reddit’s wallstreetbets forum didn’t seem deterred, with many pledging to hold through the volatility, and some even predicting another 1000% gain.

Sosnick thinks that short-sellers actually help modulate a market like this, so their exit might make the downside steeper.

“One of the things that shorts do on the way down, they provide a little support, because they tend to take profits, right?” Sosnick noted. “If you drive all the shorts out, and then the stock goes down, there’s nothing to stand in the way on the downside.”

Write to Avi Salzman at avi.salzman@barrons.com