Here’s why GameStop stock just exploded higher

Everyone is gearing up for short squeeze 2.0.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

What happened

Shares of GameStop (NYSE: GME) were trading moderately higher on Wednesday until about 1 p.m. EST, when they started gaining a little momentum. Then, seemingly out of nowhere, the stock absolutely exploded higher. Trading was halted several times as it rapidly climbed to finish 104% higher for the day. And it’s still climbing after hours.

So what

Earlier this year, GameStop stock had an epic short squeeze, orchestrated by a group on Reddit called Wallstreetbets. This group noticed that short interest for GameStop stock was over 100%. With a clever combination of buying common shares and call options (called a gamma squeeze), the group was able to cause the price per share to go up, forcing many short-sellers to close their positions for massive losses.

When the dust from the short squeeze settled, short interest for GameStop stock plummeted. Only about 40% of the float was shorted as of Jan. 29. More recent data isn’t available yet to know what it is exactly today. But the decline in short interest appeared to mark the end of the GameStop saga. The stock fell roughly 90% from peak highs.

Except, apparently, everyone simply regrouped for round two. 

Traders were out in full force late this afternoon, bidding GameStop stock back up. To be clear, 40% short interest is still significant enough to spark a mini short squeeze. However, it’s possible shorts decided to short GameStop again, thinking it was all over. After all, the stock was still trading more than 10 times where it traded before all of this began. If short interest has increased any since Jan. 29, then this could be a wild ride yet again.

Now what

Last time, many GameStop bulls felt cheated because of the trading restrictions Robinhood and other brokerages put on the stock. In a recent interview with Dave Portnoy, Robinhood’s CEO said it moved to restrict trading because it feared an impending liquidity issue if it didn’t act. Since then, the company has raised a lot of money, seemingly mitigating this risk. Considering all the negative press it received last time, it’s fair to wonder if Robinhood would restrict the buying of GameStop stock again. If it doesn’t, it will be interesting to watch just how high GameStop stock can fly.

For me, I’ll be watching with interest. But I’m not a GameStop stock buyer today. When I invest, I’m looking for strong companies with long runways for growth. GameStop doesn’t fit that description for me.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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