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How GameStop (GME) Is Creating Volatility – And Opportunities – For Investors

GameStop storefront in a mall
Credit: Eric BVD - stock.adobe.com

In a week that saw GameStop (GME) ping-pong from a low of $61.13 to unthinkable heights of $483, enriching retail investors and bankrupting hedge funds, volatility also picked up across the broader stock market. The CBOE Volatility Index (known as the VIX) hit a recent high of 37 on Wednesday, reportedly the largest one-day move since the market crashed in March, as the S&P 500 and Dow fell by the most they have in three months. 

Volatility was especially pronounced in stocks that took a beating in 2020, as the Reddit army of GameStop speculators turned their sights on other targets of institutional short sellers. AMC Entertainment Holdings (AMC), for instance, opened the week at a modest $4.71 per share; on Wednesday the stock closed at $19.90, then crashed on Thursday to $8.63. BlackBerry (BB) started the week at just $12.62; by Wednesday it was closing at $25.10, and by Thursday it was down to $14.65. Bed Bath $ Beyond (BBBY) cost $26.26 per share on Monday; by Wednesday it was $52.89, and by Thursday it had plummeted to just $33.64. 

The price action has been brutal for the short sellers, which have already lost over $5 billion on GameStop alone, according to Investopedia. But by the same token, many other investors – mostly “unsophisticated” day traders – have made millions on the action. Traders on Reddit’s popular r/WallStreetBets channel are boasting of the thousands of dollars they’ve pocketed from both long positions and call options. One personality, who apparently splurged $50,000 on GameStop call options, saw his investment soar to nearly $48 million at close of market Wednesday when the video game retailer’s stock was at its peak. 

The speculatory activity and subsequent volatility has generated anxiety among the institutional set. One hedge fund billionaire on Thursday derided retail traders for “attacking wealthy people” by coordinating purchases of GameStop and the other short seller targets. But perhaps such sophisticated investors are letting anger cloud their judgement. Indeed, they may well be overlooking an investment opportunity laying in plain sight. 

After all, hedge funds are traditionally crying out for market volatility. During the pre-Covid, post-2009 bull run, hedge funds underperformed the broader stock market year after year as low interest rates and quantitative easing provided stability and steady gains in equity valuations. In an environment where stocks consistently go up, it’s nearly impossible for most hedge funds to outsmart the market.

That’s why when volatility spiked in March 2020 as the pandemic roiled capital markets, hedge funds were able to capitalize. The leading fund managers clocked their best year of performance in over a decade, according to the Financial Times. In fact, many of these hedge funds made their money using derivatives and credit default swaps, employing similar strategies to those used by retail investors over the last few days. 

The fact is, record numbers of ordinary people have begun trading in stocks in the last year. That trend is unlikely to reverse, with more brokerages following Robinhood’s lead in slashing fees, making it easy, inexpensive, and downright fun to acquire and trade securities. 

In this brave new world, any hedge fund (and aspiring day trader) will need to expand their investment analysis from company financials and macroeconomic trends to Reddit threads, YouTube channels, and TikTok trends, where retail traders hang out and exchange ideas. The “democratization of capital markets” is well underway. There’s no putting the genie back in the bottle.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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John Hyatt

John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.

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