- [Narrator] This video was posted this week
on Wall Street Bets, a Reddit forum dedicated
to discussing stock and options trading.
This little rocket represents GME,
the stock ticker for video game retailer GameStop.
For weeks, users of the subreddit
have been encouraging each other to scoop up shares
and make bullish wagers on the stock.
In less than a month, GME rose from under $20 a share
to well over $300 on some days
before falling on Thursday
after brokers placed restrictions on trading.
- Wall Street has been totally stunned
by what's happened with GameStop.
This has basically never happened before.
- [Narrator] Alexander Osipovich covers futures
and stock exchanges for The Wall Street Journal
and has explored the forces behind
GameStop's dramatic swings.
- GameStop has become a battleground between small investors
who are banding together on online forums like Reddit
and professional investors who are shorting the stock,
or betting that it will fall.
- [Narrator] Here's what's going on with GameStop.
- Wall Street Bets
is one of the most popular forums on Reddit.
It's a place where people get together, share trading ideas,
and go after particular stocks
in a kind of coordinated fashion.
They can cause a big run up in that stock's price.
- [Narrator] In recent weeks, investors on Wall Street Bets
have targeted GameStop's short sellers
who saw the company as overpriced
and were betting the shares would fall.
The Wall Street Bets crowd was buying up shares
and betting the opposite,
causing the stock to go on a wild ride.
- Behind that is a couple of things.
One of them is momentum trading.
That's when people chase gains.
They see a stock is going up, they buy more of it
because it'll likely keep going up.
- [Narrator] But while the rise might have appeared
to be as simple as average investors buying shares
and pumping up the price, it also had to do with options.
Options are contracts that allow investors
to buy or sell a stock at a specified price
either on or until a specified date.
- It has gotten a lot easier and cheaper
for people to trade options over the past few years.
- [Commercial Announcer] Now the world
is your trading floor.
- Commissions have come down
and brokers have invested a lot of time and effort
into making easy to use interfaces
to allow people to buy and sell them,
and even do complex strategies.
- [Narrator] Options trading values set a record last year,
averaging just under 30 million contracts a day.
This year, that number is over 40 million.
Options come in two forms.
Put options confer the right to sell shares
under specified terms
and call options confer the right to buy them.
Many of the Wall Street Bets users
were buying call options to bet that the price would rise.
Look at the market on Tuesday, January 26th, for example.
GameStop closed at just under $148.
At that moment,
call options to buy GameStop shares at $200 apiece by Friday
were trading at just $19 a share.
If GameStop rallied,
the price of the options might have risen
and call holders would've been able to sell these options
for a quick profit.
The question is, why were the shares surging
when much of the action was in options?
It's because when an investor buys a call option,
someone else has to sell it to them,
typically an electronic trading firm
that buys and sells stocks.
When they sell the investor the call option,
they often hedge their bet
by purchasing shares of the stock in question.
GameStop options trading volumes exploded
during the past two weeks, especially for call options,
which drove brokers to buy more of the stock,
driving it up even further.
This dynamic isn't just playing out with GameStop.
Traders at Wall Street Bets moved on to AMC,
BlackBerry and Nokia as well.
Amid soaring shares,
on January 28th popular online brokerages,
including Robinhood and Interactive Brokers Group,
restricted access to trading high flying stocks,
including GameStop.
Shares plunged.
- Trading a stock like GameStop
in a situation like this is extremely risky.
If you are do playing with this stuff,
you are playing with fire.
It's unclear if the authorities
have any means of reining this in.
- [Narrator] Wall Street Bets users called foul,
some pledging to find other ways
to participate in the market,
regardless of the chaos it causes.
(gentle music)