In options trading, entering into an agreement to buy a stock on a certain later date in return for selling it now, even though you don’t own it yet, is called a “short call option”.
You bank the cash for selling it, and if the price goes down as you expect it will, you use a portion of that cash later to buy it back at the lower price, and the difference is your profit.
Yes. Stocks are the ONLY things on earth you can sell before you own them, and buy them back later. This is only possible because the markets make it possible, and by that I mean the operators of the actual NYSE.
Now, if the stock goes UP, you have to buy it back anyway, even if you lose money on the deal. And if you short-sold it at $20 planning to buy it back at $5, and instead it goes to $500, you lose hundreds of dollars a share buying it back.
In some cases, when the big money people who sold a stock short do it in teams, so that the whole WORLD of that stock is involved, they can perform a trick; they can buy the stock over time, and then sell it quickly as a group, so that more sales than purchases hit the market all at once, and the price goes down. They can create momentum, causing other owners of the stock to also sell it to prevent further losses. Once the price goes down enough, they exercise the buyback part of their options, and they make a ton of money… having DRIVEN THE PRICE DOWN in the first place by their joint actions.
Now… when someone else of sufficient resources knows a stock is being sold short and the price is being run down, they can create a “short squeeze”, which is to say they can counter the rundown momentum by buying the stock, also acting as a group (not of big money people but a big GROUP of small money people). The buying stops the downward momentum the big money people were creating, and turns the price upward again with more purchases than sales in the market.
And as the price goes up, more people start buying, and the numbers of shares being bought goes up. Fewer shares are thus available to be bought by the big money people to end their short positions. They all got on board for the market manipulation, all going short on the same stock, all selling shares of it to get downward momentum on the price, and all waiting to pounce and buy it back when it got cheap so they would have big profits.
And now, instead of going down, the price is going up, the shares are being bought and disappearing from the market, and the guys who WANT to end their short positions by buying it back even if it’s too high and they lose money? There aren’t even enough shares for sale that they can BUY them. And the price keeps going up, and their short sale keeps going more and more into loss.
They can’t get out.
If everyone is a buyer, there aren’t any shares for SALE, and the price keeps GOING UP on buying pressure.
For a guy who sold a million shares at $20 and planned to buy them back at $5 to make a $15 per share profit, the idea of having to buy it back at $50 is a nightmare. Instead of making $15 million, he LOSES $30 million… and that’s only if he can find a million shares to buy back. Meanwhile, the farther along he goes, the higher the price gets, and the closer he gets to the resolution date of his option contract. That’s the day he HAS to pay, whether he’s ready or not.
In a way, what they were doing is underhanded as hell. Selling in concert to create downward momentum, which other stockholders then add to by needing to sell their own stock to cut losses (which they didn’t have to suffer but for the manipulation of the big boys), that’s kind of dirty pool. The honest holders of the stock have no idea of the team effort to get the price DOWN, by big guys selling short. They only know their investment went south all of a sudden and they have to sell to cut their losses.
But there is a risk to all of that, and they have now experienced it firsthand. The “short squeeze”, when the short sellers are losing more and more money, and they can’t stop their losses because the stock is not plentiful enough for all of them to buy it back… and the price just keeps going up… and their contract deadlines keep getting closer.
What did the market do, what did the trading companies do?
They KILLED OFF the ordinary guy’s chance to buy the stock when the price was going up, and thus make a little money. Stopped trading on the stocks in question, started going after the little guys who were beating the big guys at their own game.
They acted because the big guys who were doing the short manipulations RUN the place, THEY make the big money, and ordinary little guys can just go to hell. The market serves the big guys, period. Yet another elite swamp that’s really all the same swamp. The rules get made up as the big guys go along. It’s their game, their ball, and they’re deeply annoyed at having been figured out by a bunch of ordinary people.
It will only get worse for the elites. The Game Stop Affair will inspire group after group of ordinary guys to pay close attention and do the same underhanded stuff as the big guys, only AGAINST them instead of for them.
There will probably come a day when millions are banned from ever buying stock. But at this point, barn door already open, horse already out, close the door if you want but what’s done is done and what’s learned is learned.
The short sell is suddenly WAY more risky for big money.