Name: GameStop, Reddit, and the Rise of Risky Trades
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As many as one in four Americans have invested in speculative "meme" stocks in 2021, many using new mobile apps like Robinhood. How risky is it for small investors entering a volatile market?

Investing in stock call options is extremely risky.

Alex Clark is the Digital Video Producer for the NOVA Science Studio. He produces original videos for the program and leads video production training for site coordinators and students. Alex is a video journalist, cinematographer, and instructor of documentary filmmaking and he holds a degree in journalism from Columbia University. He has created TV and digital content for PBS, NBC, and NowThis. A lover of all things science, he produced and co-hosted Vox’s Emmy-nominated YouTube series, Glad You Asked.

As many as one in four Americans have invested in speculative "meme" stocks in 2021, many using new mobile apps like Robinhood. How risky is it for small investors entering a volatile market?

GameStop, Reddit, and the Rise of Risky Trades

Investing in stock call options is extremely risky.

Tech & Engineering

GameStop, Reddit, and the Rise of Risky TradesPublished: April 27, 2021Alex Clark: I'm not a trader but I follow a subreddit on Reddit called Wall Street bets. I hear that GameStop is going to rise. So I have a little saved up. I decide, Hey, I'm gonna buy a stock call option. That's like buying a hundred shares of a stock on layaway. You just need a fraction of the amount of money it would take to actually buy 100 shares. The trading day is just starting. I'm betting that the stock is going to rise but suddenly the website crashes, the phone lines are down. I can't get in touch with anyone and my trades are not going through. So I forget about it and I go along my day, make some coffee. And then I look back at the site. Somehow my account is down $9,000. That's more than I even had in it.Sebastian Castillo: Investing in options is wildly dangerous. You can lose an extremely large amount of money or be down in position an extremely large amount of money in a very short amount of time.Clark: Everyone loves the story of a little guy taking on the man which is why GameStop's story to a peak stock value of 480 plus dollars was front page news for days. It'll be featured in forthcoming films and even Congress is taking a closer look at the action. But what's overlooked is the tremendous amount of risk retail investors, small people like you and I take on when entering into a market with so much volatility. It's a story of math but it's also one of the emerging technologies. Before we talk about what's happened, let's go over to Gamestop and see how they're doing. Gamestop. Let's go. So, this is my local Gamestop and apparently they closed just last month. And that isn't a one-off because in the last two years, they've closed more than 700 shops with more closures to come. GameStop's brick and mortar retail business is in the dumpster. This company's once high flying stock was trading below 10 bucks a share for all of last year. In just a few weeks, it had suddenly doubled, tripled, went up 10 times in price and it was still going. How was this possible? Ever since the pandemic downturn in early 2020 the stock market has done quite well. And millions of everyday traders, new traders, have decided to take a turn of rolling the dice at the market. And then a group of Redditors saw that there was enormous interest in short selling certain stocks by Wall Street hedge fund firms that have a lot of money. Shorting is a bet that a stock will go down. These hedge funds were targeting businesses in trouble. This include stocks like AMC theaters, bed, bath and beyond and of course, GameStop. That caused Redditors to decide to target the hedge funds. And it's still happening today.Madison Darbyshire: Wall Street bets is a community that's been around for a little while and it's always been kind of an irreverent neolistic investment community where people went for big gains and big losses and strong positions and hilarious memes. And you would buy stock if you thought a meme was super great, just cause, I mean, what did you have to lose?Clark: This is Madison Darbyshire. She covers retail investing trends for the Financial Times. Reddit users are not a monolith but many of them got together to coordinate large purchases of the stock and hold them. This led to many who had short positions, who were betting that the stocks would go down to have to buy more to cover their bets, which forced more short sellers to get out of their losing positions by buying more. It's hard to overstate how high the interest of these stocks got on the week of January 25th. The Wall Street bet subreddit grew by millions of subscribers. My Barber had stock options. Even my therapist said that she bought Gamestop. Sebastian Castillo is one of the people who recently began trading again.Castillo: Hey, everybody!Clark: He plays the options on the Robinhood app, a much riskier form of trading.Castillo: The bet I made for $600 is now worth $70.Clark: An option is a contract that gives you the right to buy or sell 100 shares at the price you choose. That's called the strike price. For example, if you buy a call option of Gamestop at $100 it gives you the right to buy 100 shares at any time between the moment you buy it and the expiration date. So the math works like this. Let's say the stock goes up to $105. You could exercise your option and the person who sold it to you would be forced to give you 100 shares at $100 each. So, you've basically netted $500 in profit, of course, minus the price you paid for the option. But if the price goes down and ends below your strike price of $100. Let's say it goes to $95, it's worthless. You would never exercise your option because you would never pay a hundred dollars for something valued at $95. So you've lost all the money you paid for the option in the first place.Castillo: With options, it's almost like stocks is checkers and options is chess.Clark: So to recap, if you're buying a call betting that the stock price will go up, you can make money if the stock price goes up beyond a certain amount. If it goes down, you lose everything you paid for the option. And a funny side note, Sebastian is actually a gamer and a leader of a nerdy game group.Castillo: I kind of have mixed reviews about this place but I guess if you needed to pick something up same day in a hurry, it would do.Clark: So he knew GameStop was worth much less but that didn't stop him from investing.Castillo: This is GameStop stock. It's trading at $330. When I checked the Wall Street bets forum and people are talking about buying in and holding it to go to the moon. If that's not the moon, I don't know what it is.Clark: $330 a share. That's more than 33 times what it had been trading a month earlier. According to polling, as many as a quarter of Americans bought these meme stocks in January. Stocks that were being heavily promoted on forums, where app trading was popularDuring the game stock pandemonium, there are times when the live ticker kind of froze and even the trade button to buy or sell it was unavailable. And that's when I knew things were really getting out of control when they couldn't even handle basic transactions.So many new investors had entered the market at this time that brokers just had trouble keeping up with all the orders. And that's what happened to me at the beginning of this video. I put in a market order when the cost was low but because the platform froze, the trade didn't go through immediately. It was filled much later when the price had more than tripled. So, I was thinking I was buying one thing when I was on the hook for more than $10,000. So it seems a few things were going on here. First, Robinhood and others decided to halt trading of the most popular stocks in America. The sites just couldn't handle the load of all of these users, which is known as-Darbyshire: Operational resiliency is what they call the abilities of the platforms to function under times of extreme stress and all of the investment platforms this year have really struggled to maintain their functionality. All these brokerage platforms have essentially been built since the financial crisis. 10 years ago, you couldn't buy stocks and shares on your phone.Castillo: It was like staring at a screen full of numbers, looked like a giant Excel spreadsheet. It could be very intimidating. The accessibility has really just exploded. It's become so much more easy to understand , so much more easy to research new stocks.Darbyshire: All of these platforms have had tremendous user growth in the last year. So they really are struggling to adjust to the new level of investment participation.Clark: And some brokers just simply didn't have enough cash on hand to handle the amount of trades that were happening on mass. Robinhood had to go and raise a billion dollars from investors. To wrap things up, the risks are quite high for your average investor entering into the market. For one, stocks are highly volatile and these meme stocks, who knows what could happen to them. These apps like Robinhood and Webull aren't always the most reliable place to invest your money longterm. As for my personal story, I waited a few of the most stressful hours of my life and eventually the game stock price did rise. So I was able to break even, but it wasn't a wise investment. I came away with a feeling like the whole system was not meant to protect users like me because I had no control over the situation.Darbyshire: By the time information becomes widespread, everybody knows about it and you're not gonna get ahead of the herd or the institutions that have access to this information earlier and are able to execute trades faster. So one of the things that surprised me the most was how many people bought shares in GameStop when it was above $400 only to be left holding the bag when the price came back down to earth.

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GameStop, Reddit, and the Rise of Risky Trades

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