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Short-Selling, Options, and Other Fads


Last week we discussed recent hoopla over GameStop common stock (GME) and the Robinhood trading platform. GME suddenly became very volatile, and a lot of quick money was made and lost. Not unexpectedly, those speculators who lost were angered and were willing to blame “the system,” or virtually everyone else, except themselves (of course).

How volatile was GME? On April 3, 2020, the low trade was $2.57/share. On January 28, 2021, the high trade was $483.00/share. That is an increase of 18,694%. The closing price on Friday, February 5, 2021, was $63.77, a decline of $419.23/share in just 6 trading sessions.

Whenever a large amount of money is made in the market, it generates an understandable amount of attention. It also results in an absurd pattern of trading activity. All too often, that activity brings in many unqualified players. How do unqualified traders participate in an arena they do not fully understand? There are some companies that do not properly vet their customers before allowing them to participate in fast-moving and dangerous stock trading.

Without editorializing as to the regulation of financial markets, as professional Financial Advisors, we would never recommend that our clients get involved in Short Selling (selling securities you don’t own) or Derivatives (all kinds of options, including puts and calls). Normally, we are not asked about these areas of Speculation (as opposed to Investing). That changes during periods of intense excitement and media coverage, such as the recent GameStop fad.

Every definition we can find for the word fad includes terms such as temporary, short-lived, craze, and other terms for ideas that fade away. See the grammatical similarity between fad and fade? Coincidence? We think not.

Speculation is short-term activity, whereas Investing is a long-term process involving attainable goals, planning, and patience. People in any age group and/or economic status can become successful investors. The clientele of Van Wie Financial demonstrates that principal. We represent a microcosm of the gigantic world of free financial markets and participants.

Very few speculators will succeed over time. A few will make extraordinary gains, but the majority will likely lose their proverbial shirts.

We are watching for the day GME once again trades for $2.57/share, reasonably certain that day will soon arrive. GameStop is already losing money, and their business model reminds us of Blockbuster Video, which faded away as trends changed. Who will lose the remaining $60+ per share? It will most likely be speculators who jumped into the fad without any justification.

Van Wie Financial is fee-only. For a reason.