GameStop shares, which saw a staggering rally, fell 31% on Monday to close at $ 225, 53% less than the January 28 peak of $ 483.
Who could be affected?
Analysts are concerned that some new or inexperienced investors may face losses if they buy where the stock has peaked.
Those who bought “on margin” would be particularly vulnerable, using borrowed money from brokers to buy additional shares.
The strategy can boost gains when stock prices are on the way up, but it amplifies losses on the way down, especially if brokers issue “margin calls” that require clients to add funds or face forced sales to restore account equity to desired levels.
Brokers are not required to notify clients when selling shares in a margin call, “although most of them do so as a courtesy,” according to the Financial Industry Regulatory Authority here, the industry self-watch body.
Riley Adams, a 31-year-old financial analyst, said that if investors bought on margin late, “you’re definitely exposed now.”
Thomas Pettervey, chairman of Interactive Brokers, estimated that about half of the platform’s 1.2 million accounts are margin accounts.
He said thousands of margin calls happen on a regular day and the rate increased last week.
Petrvie said about 27,000 accounts held some type of position on GameStock, and many of the liquidated positions were owned by traders who shortened GameStock.
Brokerage representatives TD Ameritrade and Robinhood declined to share details of how many clients may have traded GameStop stocks on margin. Schwab’s representative did not respond to questions.
However, Robinhood here has restricted stock purchases, limiting investor exposure to its platform.
What does this mean for options traders?
Option bets on GameStop stocks helped fuel the dizzying stock rally. Some market watchers say that market makers who have sold large numbers of calls to investors are balancing their positions by buying the underlying shares which has been the main driver of GameStop’s sharp rally.
In theory, a sharp fall in the stock could push these market makers themselves to empty their stocks, which could accelerate the decline. This is what happened last September, after investors pooled buying options at technology-related companies such as Amazon.com Inc and Alphabet Inc. The dismantling of these centers helped fuel a sharp decline in the Nasdaq.
But for now, the open interest in GameStop calls appears to have not built up significantly, with many buyers of those contracts trading them on the same day, according to Christopher Murphy, co-chair of derivatives strategy at Susquehanna Financial Group.
And more contracts remained open between GameStop systems, according to data from Trade Alert.
Another major risk is market participants who sold those deals, and betting that GameStop shares will not drop below a certain level if the stock falls significantly below their targets.
But with options prices already representing huge swings in stocks, Murphy said: “People with short-term options may not lose as much as you think.” In general, GameStop options are now priced in daily moves at around 27% over the next month, versus Around 8.5% at the start of January, according to Trade Alert.
On the other hand, investors who have stuck to calls for additional gains in GameStop stocks may lose their investment in full if the stock does not reach the target price before the options expire.
What does it mean to trade short sellers?
Ihor Dossanjowski, managing director of predictive analytics at S3 Partners, on the slide in GameStop stocks, said that short sellers looking to profit by finding “attractive exit points” may sell borrowed stocks in a bet that prices will drop and the shares can be bought back when Lower level.
At the same time, Dusaniwsky said, the slide could trigger new short positions looking to jump on any downward price momentum.
Dusaniwsky said the number of GameStop shares shorting has more than halved in the past week, as short positions covered their bets.
Dusaniwsky said if new short positions join with falling stocks, it will exacerbate the sell-off, as longtime equity holders try to exit their positions to make a profit.