I’ve taken notice many new retail investors aren’t familiar with what a margin call is yet. This term is used a lot within the AMC community when referring to hedge funds.
I’m going to explain what a margin call is in simple ape language and further explain how this relates to hedge funds shorting AMC stock.
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What is a margin call?
A margin call occurs when the value of an investors brokerage account falls below the broker’s required amount. This is when a broker demands that an investor deposits additional money into their account so that it meets the minimum requirement.
A margin call is usually an indicator that a security (asset) held in the margin account has decreased in value. When a margin call occurs, the investor must either add funds to their account or liquidate (sell) some of their assets in that account.
Why does a margin call occur?
- It may occur when an account runs low on funds usually as a result of a losing trade
- A margin call occurs when a demand for additional capital is required to meet the minimum margin requirement
- Brokers may force traders to sell assets, no matter the current market price, in order to meet the margin requirement if the trader does not deposit the funds
How does a margin call work for short sellers (hedge funds)?
Short sellers will always have a margin requirement because their practice involves selling a stock that is borrowed an not owned.
This means that short sellers will always be required to fund their accounts and meet the minimum margin requirement.
If the value of the position falls below the margin requirement, short sellers will be forced to close their positions or increase funds into their account.
Short sellers face major heat
Seeing as AMC has never been this high before, short sellers are more than likely already funding their accounts so they don’t fall below margin requirements. This means Kenny is taking money out of his pocket to keep his short position open in AMC and other so called ‘meme stocks’.
AMC’s highest share price was in the low to mid $30 dollar range back in 2016 before this squeeze play. This means hedge funds and short sellers have negative balances at the moment. Right now they’re feeding their accounts from their pockets.
Retail investors vs short sellers
Retail investors have the upper hand right now. Short sellers are losing a lot of money on paper, and in reality. It really is a game of who caves in first. The AMC community may continue to surge the share price as long as the stock is being bought and held.
Short sellers will be forced to put money from their pockets into their margin accounts or close out their entire position, so as long as the share price continues to keep them negative.
The result? A short squeeze.
When will short sellers be margin called?
Short sellers can be margin called at any given moment. I wouldn’t be surprised if some accounts were already margin called, forcing the investor to fund their account above the margin requirement.
How will we know when shorts begin to cover their positions in AMC?
AMC’s share price will be experiencing several gamma squeezes driving the price action up. These movements will be incremental and much smaller than an actual short squeeze. AMC’s short squeeze will be violent. Hedge funds with a lot of money can hold their positions much longer than individual investors short selling the stock.
When large institutions shorting AMC stock begin covering their positions, we’ll begin to experience the start of a short squeeze.
Retail investors participating in this once in a lifetime trade must continue to do what they’ve already known for months. The tide has turned and soon AMC’s short squeeze will begin to unfold.
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