Short sellers betting against AMC and GameStop are putting themselves in a very risky situation.
Last year, AMC struck a blow to Ken Griffin’s Citadel, causing the hedge fund to lose billions.
Anchorage Capital closed after betting against AMC – the hedge fund held 4 million puts of AMC at one point.
Today, Gabe Plotkin’s Melvin Capital is shutting down due to the repercussions from betting against GameStop.
Hedge fund White Square Capital is suffering the same fate this year.
Are short sellers biting more than they can chew?
Let’s discuss it.
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Is AMC still being shorted?
Yes, AMC is still being shorted.
AMC stock has a high short interest of 23.43%, utilization rate of 100, and approximately 180 million shares on loan.
After AMC surged to $72 per share, AMC’s short interest dropped from 23% to 20%, then to 14%.
The short interest has slowly made its way back up to over 23% all these months.
But why are short sellers making their way back in to short AMC stock?
Do they not know AMC Entertainment is no longer a short play?
It made sense for short sellers to go short on the company during the pandemic when the company was on its knees, but it’s no longer the same company.
The largest movie theatre chain in the world has proved to have a strong recovery, beating every quarterly earnings since 2021.
This year AMC dominated with powerful Q1 earnings results.
AMC’s rising short interest only makes the probabilities of a larger short squeeze possible.
Are short sellers being misguided?
Has the abrupt closing of hedge funds not proven anything?
Are short sellers going to get squeezed?
Small short sellers should keep in mind that it only takes one big short seller to close their positions in AMC stock to create a chain reaction.
There is a big risk knowing big institutions shorting AMC stock may either default or get forced to close short positions.
The impact this would have on smaller short sellers would be grand.
How about the rising fees and cost to borrow shares?
It is now costing short sellers a lot more to short AMC stock.
AMC’s cost to borrow has doubled in only a weeks-time to 4.49.
And according to Stonk-O-Tracker, AMC’s short borrow interest rate has increased to 10.60%.
As the short interest continues to rise, we will see that the cost to short AMC will also rise.
The question then becomes, at what point is shorting AMC no longer worth it?
The bottom line is short sellers will eventually close their positions whether they profit, break even, or cut their losses.
The risk for small short sellers is not knowing when big institutions will bring the hammer down.
Here is what threatens short sellers
#1. The rising cost to borrow shares
The cost to short AMC stock is only increasing.
Not only are there not enough shares available to borrow, but overleveraging a position is never a good idea.
Short sellers will eventually owe back more than they can afford to.
The risks are high.
#2. Heavy buy volume
While volume tends to be relatively lower during bear rallies than during bull markets, big buying pressure is a real threat to short sellers.
A reversal in the market will trigger big price moves due to heavy buying.
As the price of a stock surges, short sellers will be facing unrealized losses far greater than they could have ever expected.
And just like during a bear market when stocks fall no matter the circumstances, we can expect a bull market to begin reaching new all-time highs like we’ve seen in the past.
Keep in mind, bull markets also last longer than bear markets, making holding unrealized losses a massive inconvenience for short sellers.
#3. Big institutions closing short positions
As stated previously, big institutions are facing a lot of scrutiny.
Executive order 14032 recently prohibited institutions from using Chinese securities as collateral.
This means affected hedge funds are on a race scrambling for liquidity.
Keeping up with margin requirements is becoming tougher.
A highly likely scenario is one where big institutions hedge against the short positions by going long and close out their short positions, creating a short squeeze and balancing their books to an extent.
Smaller short sellers have no control over this and are playing with a double-edged sword.
Now, mainstream media won’t talk about this because it goes against the agenda of big institutions.
Just something to keep in mind.
Are short sellers more at risk than retail investors?
What do you think?
Who is more at risk – short sellers or retail investors?
Leave your thoughts in the comment section of the blog below.