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GameStop Stock: Is This A Perfect Setup For A Short Squeeze?

GameStop stock could be on the verge of new short squeezes, as the stars appear to align for the “meme mania” favorite once again.

GameStop stock  (GME) - Get GameStop Corporation Report continues to be the target of short-sellers. At high levels of short interest that make GameStop stock increasingly difficult to short, short-sellers need to be increasingly resourceful to stay alive.

Up almost 30% during the May 25 trading session alone, a favorable setup for GameStop shareholders appears to have formed, something that could spell trouble for short-sellers.

Figure 1: GameStop Stock: Is This A Perfect Setup For A Short Squeeze?

Figure 1: GameStop Stock: Is This A Perfect Setup For A Short Squeeze?

(Read more from Wall Street Memes: What GameStop and Other Meme Investors Need to Know About TradeZero)

Cost-To-Borrow At Peak Levels

Recently, during the May 25 trading session, GameStop shares climbed about 29%. One of the reasons behind the rally may have been the substantial increase in borrowing fees that short sellers need to pay to establish short positions in GME.

As a stock considered "hard-to-borrow", GME cost-to-borrow rates shot above 104% at one point, when few GME shares were available.

The chart below shows the history of cost-to-borrow rates in GME. In recent days, the numbers have reached their all-time highs.

Figure 2: GameStop borrowed shares.

Figure 2: GameStop borrowed shares.

Shorting costs are driven by utilization (amount of shares available to sell short), the amount available to borrow, liquidity, amount of shares available, volatility, and other factors that may determine asset pricing anomalies.

GameStop seems to have checked a few of the boxes above, which probably caused the key indicator to rise and kept short sellers in check.

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More Short Squeezes In Sight?

Short squeezes, as described in GameStop’s 10-K filing, are one of the main risks associated with the company's shares. But it is also one of the main reasons why retail investors got into the game to begin with. Now, short squeeze catalysts could be lurking around the corner:

  • GameStop continues to be a strongly shorted stock, with short interest levels exceeding 20% of its rather modest float of 63 million shares – AMC, for example, has a float of 513 million units.
  • Of the total float, at least 9 million shares are known to be registered on the Direct Registration System. The practice of using DRS is intended to leave retail investor shares out of the hands of brokers that can lend them to short-sellers.
  • The utilization rate in GameStop follows at over 100% for more than 70 consecutive days. If accurate, this rate implies that there are no more shares available to be lent for shorting. Keep in mind, it does not mean that short sellers cannot continue to short the stock. It means that they need to seek other resources to find available shares.
  • Finally, the cost-to-borrow rate is at its highest since the beginning of last year. With short sellers having to pay higher fees to bet against GameStop, they are naturally more vulnerable, especially if pressured by GME bulls.

Perhaps most importantly, buying volume seems to be rising, driven by retail investors’ renewed interest in the shares and GameStop's “meme stock power”. According to an SEC report on GameStop's trading activity in January 2021, popularity has been the key to igniting surges in share price.

The report concluded that the main causes of GameStop's massive rally last year were: (1) frequent Reddit mentions, (2) significant coverage in the mainstream media, (3) large volume of shares exchanged, and, sure enough, (4) elevated short interest.

Reddit buzz around GameStop is as strong as ever. The stock became the most discussed ticker on Reddit following May 25, head and shoulder above others. See below.

Figure 3: Trending stocks on Reddit on May 26.

Figure 3: Trending stocks on Reddit on May 26.

Ask Twitter

GameStop has jumped 37% in the past five trading days. Is there a massive rallying beginning to form?

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)