Short Sellers Aren't In A "Comfortable Position" On GameStop Stock

Short Sellers Aren't In A "Comfortable Position" On GameStop Stock ...

The battle between GameStop (GME) - Get GameStop Corp. Class A Reportbulls (or rather, apes, as they are known) and bears is far from over. Lately, GameStop and other meme stock firms have been sending it to those who have been tipped against them.

After a disappointing quarter, here''s an idea for a capital management firm that has short positions in GameStop. They recently presented their long-short fund investment thesis and their projected next steps.

Short Sellers Aren''t In a "Comfortable Position" Figure 1:GameStop Stock

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Inside A Short Sellers Mindset

The Amalthea fund, founded by Bronte Capital, an Australian capital management firm, has a long and short strategy. On the short side of things, they have taken positions betting against almost every major meme stock, including both GameStop and AMC.

The fund''s Q1 performance results were recently released to investors. Although the fund did not perform as well as global markets in general, it fell 5.77%, while the MSCI All Country World Index (ACWI) - Get iShares MSCI ACWI ETF Report fell 12%, and the funds manager said they were dissatisfied with the quarter''s findings.

When it came to this rally, Amaltheas'' lackluster performance was a meme stock rally. The fund specifically made reference to its bearish GameStop position.

GameStops'' valuation is ridicule, even if one factor in the company''s modest success in reinventing itself. GME''s recent financial results have been terrible, and the company''s market cap doubling in March was ridicule.

The firm admits that its understanding of GameStop''s "absurd" valuation might still double in the near future.

"[GameStop''s] valuations are absurd, but if you double the price, they are not twice as absurd. They are just similar to the reality."

The bear analysis by Bronte Capital on GameStop adds stability as well. Fund managers believe that retail mania is diminishing, and that recent volatility still pales in comparison to the previous year''s squeeze.

Hard Times Ahead For Short Sellers?

Bronte Capital outlined some opportunities for GameStop as well as other meme stocks.

GameStop has announced a stock split proposal, which will be debated in early June. According to Bronte Capital, "not accepting that stock splits add value is a recipe for losing money."

In the options market, the potential of a stock split is most evident, where a standard put or call contract leverages 100 shares of an underlying asset. Options, therefore, tend to be more expensive when the underlying shares themselves are more expensive.

A near-term, slightly out of the money (OTM) GME call option contract, which expires on May 6 - currently costs $800. If GameStop offers a 3-for-1 split, similar near-term OTM calls may sell for $266. A reduced GME share price would increase basic GME options for the masses (i.e., retail traders).

Bronte Capital has thus been hesitant about the possibility of a stock split on the GME options market. Originally, they were skeptical, believing that options trading was driven largely by professionals with significant capital at their disposal, not "retail oddos. However, the equity firm has begun to realize that retail traders are often the primary drivers of options prices, which, in turn, can influence stock - especially meme stock - performance.

Bronte Capital is in a self-described position of little comfort because of the threat of options.

GME is still very short, but a squeeze may be imminent.

Short sellers are still playing with fire in terms of summaries and to repeat what weve seen in many GME articles over the past few months. But they know it. GameStops short interest is currently at 21% of its float, with approximately 14.13 million shares being shorted. The figure is higher compared to the previous month, when 12.35 million shares were being reduced.

A high short interest may be linked to a company''s poor fundamentals. However, a short interest above 15%, which is considered to be quite high, may set a stock up for a squeeze. Especially if there''s significant buying pressure triggered by a short-term catalyst - such as a stock split.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report, but the article may also include affiliate links. These partnerships do not influence editorial content. Thank you for supporting Wall Street Memes)

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