Shares in GameStop double again, adding to 250% gain this year

Traders said short-sellers were quickly buying back into the stock to cover potential losses, defined as a short-squeeze, and retail investors piling in to benefit from the surge.

Some investors had bet against GameStop, viewing its retail business model as outdated. The short betting was pretty evident with 100 per cent of the shares available to borrow to speculate against the company already out on loan, FIS’ Astec analytics data as of Friday showed.

WATCH: How short selling works

An animated explanation of how people make money from stocks losing value 0:46

Short sellers typically borrow and sell shares in companies they expect will fall in price, hoping to buy them back at a lower price and pocket the difference.

But GameStop shares began to rise as investors cheered the video game retailer’s announcement on Jan. 11 about appointments to its board to double down on digital sales.

Last week, short-seller Citron Research said the stock would be “back to $20 fast.”

“The sudden, sharp surge in GameStop’s share price and valuation likely has been fueled by a short squeeze,” said Joseph Feldman, lead analyst for Telsey Advisory Group in a research note on Monday, which downgraded the stock two notches to “underperform” from “outperform,” citing a disconnect between fundamentals and valuation.

Volume has also surged in GameStop options, hitting a record of 2.13 million contracts on Friday. On Monday, about 355,000 GameStop options contracts had traded, about four times expected volume, according to Trade Alert. Given the sharp ascent in GameStop shares, expectations for volatility have likewise climbed. Based upon Trade Alert data, options are now pricing in an average move of about 23 per cent over the next 30 days.

“This is not normal activity, and you also have to be careful that the music stops, so to speak — that these buyers stop and it becomes like a game of musical chairs and you don’t want to the one stuck without a chair and nowhere to turn to sell this,” said JJ Kinahan, chief market strategist at TD Ameritrade. “So, the momentum that caused it to go up can also be the momentum that causes it to go down, very quickly.”

Among the eight analysts who cover the stock, four rate it “hold” and the rest recommend “sell.” The median price target is $12.50, an ~86 per cent discount to current levels, according to Refinitiv.