1 Shorting is a trading strategy that involves selling stock in anticipation that it can be bought back at a lower price. An investor profits by borrowing the stock from a broker at one price, selling it at the market price, and buying it back at a lower price to complete the borrowing transaction.
2 Far out-of-the-money call options have strike prices that are much higher than where the stock is trading. Buying far out-of-the-money calls in bulk (as meme investors did) can increase the pressure on brokers to purchase the underlying stock to hedge their own risk.
3 A short squeeze begins when a stock price jumps higher unexpectedly, forcing investors shorting the stock to buy it instead, to cover their short bets.
4 Returns during 10/1/2020-9/30/2021
5 To reach the estimated returns for an “average” investor in meme stocks we summed the weighted return from the high, low, and opening price on each trading day by that day’s proportion of total year trading. For example, if on February 1st GME opened at $100 and closed at $105, the daily return was 5%. If the high and the low for the day were $110 and $95, respectively, the daily return from the high and low price was -4.55% and 10.53%. Next, we determine the share of one year trading that occurred on a given day. If the full year saw 100 million shares exchange hands, with 5 million traded on February 1st, then 5% of shares were traded on this date. The contribution to full year performance on February 1st in this scenario is 0.25% for investors who bought at the open (5% x 5%), -0.23% (5% x -4.55%) for the investor who bought at the high, and 0.53% (5% x 10.53%) for the investor who bought at the low. Summing these figures for all trading days between 10/1/2020 – 9/30/2021 results in the range of returns we examine here. Our use of daily returns from the open, high, and low, and the proportion of shares exchanged on any given day, results in a range of returns that can approximate the mean return for all investors who traded these names throughout the year. In other words, the average investor.
6 One-year period from 10/1/2020-9/30/2021
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