It just goes to show how risky it is to invest in a stock because you think its price will go down. Short sellers borrow shares and sell them with the hopes of buying the stock again at a lower price so they can pocket the difference between the price they sold at and the repurchase price.
“Investors may not be buying into the fact that some of these stocks should go up this quickly. They think that what goes up must come down and that they will run out of gas,” said Dan Pipitone, co-founder of TradeZero America.
What goes up sometimes keeps going up
The problem with this strategy is that if a stock goes up, the loss on the short position increases and multiplies the higher the price goes.
And that’s why some short sellers are giving up on their bearish bets. It’s too painful to short a stock with strong investor support in the hope that driving the stock higher will “squeeze” short sellers into submission.
“It’s one thing to be long and wrong,” said TradeZero America’s Pipitone, noting that an investor doesn’t have to take a loss on a stock until they sell the shares. “But if you are holding a stock short, it can get prohibitively expensive.”
For now, it appears that the bulls have won as the shorts are throwing in the towel on GameStop. Shares are up about 950% in 2021 alone, soaring nearly 4,600% in the past 12 months.