Infinity Squeeze

In our last post, we discussed the actions of Robinhood in the last few days.  We are going to continue looking at that and talk about what the heck is an infinity squeeze as well.

The first thing to understand is that, in the morning trading session on Thursday, Jan. 28, the Redditor army (which overlaps with the Robinhood user base) came very close to achieving their goal of setting off an “Infinity Squeeze” in GME.

Looking at what happened, and the way it did, it is clear that GameStop was mere minutes away from going completely vertical, at which point it could have run to $1,000 or more.

If the infinity squeeze had unfolded — and it was oh, so close — various Wall Street entities, including not just hedge funds but brokers and banks, could have been forced to eat more than $60 billion in losses.

The events of Thursday, Jan. 28 are related because it was the near-completion of the Infinity Squeeze that scared the daylights out of Robinhood; and it was the buy restrictions set in place by Robinhood (and Interactive Brokers, among others) that prevented the Infinity Squeeze from happening. Temporarily at least. It may yet come to pass.

There is a lot to work through here. To start we’ll walk through the $60 billion estimate and explain where that comes from. Let’s do some quick math:

  • The tradable share float for GameStop Corp., according to FinViz, is 50.65 million shares.
  • A recent estimate of the short float — meaning the percentage of shares that have been borrowed for a short sale — is 121.98%. (It is entirely possible for shorts to make up more than 100% of the share float, for technical reasons we won’t get into here.)
  • If the Reddit army can trigger an “infinity squeeze” — meaning the price is pushed so high that margin calls force the shorts to buy back at any price, because their brokers are forcing them out of positions — the GME share price could run to $1,000 or more. (It is above $400 in the Jan. 29 premarket as of this writing.)
  • If the caught-out hedge fund shorts were forced to cover 100% of the GME float at $1,000, that would cost about $50 billion (because $1,000 times 50.65 million shares is just over $50 billion).
  • But the short float in GME remains above 100%. That is because, even as some hedge funds have closed out of their GME shorts, others have reshorted again, in hopes of winning the epic battle with the Reddit army to prevent the squeeze.
  • If, say, the shorts had to cover 120% of the share float at $1,000 — in order to cover the short float — that would be a sum greater than $60 billion, rather than $50 billion.
  • If the price were squeezed above $1,000 per share, the final cover price, forced by the brokers, could be even more than $60 billion. It could be a price tag so high, in fact, that not only would multiple large hedge funds go bust, a number of brokers and possibly even banks could get taken out alongside them.

That is the point where the GME share price could go to $1,000 or even higher — possibly even to $3,000 or $5,000, who knows — because there aren’t any shares to buy, other than the ones that the Reddit army is sitting on.

This is how an infinity squeeze works, and it also clarifies why the attempt is rational if you can pull it off. The Reddit army does not intend to hold its GME shares forever.

They just want to hold the shares long enough so that blown-out hedge funds, or their brokers, are forced to buy in at some insane share price of $1,000 or even higher, transferring great wealth into the Reddit army’s pockets as the hedge funds and brokers go bust.

If you execute an infinity squeeze properly, you don’t stick around forever. You exit by selling to your vanquished opponents who are forced to buy, at a price that simultaneously transfers wealth from their hands, in a process that could very well bankrupt them — while making you rich.

The problem, from Robinhood’s perspective, is that a successful infinity squeeze could have killed the firm. It could have ended Robinhood, the brokerage, by burying the firm in an avalanche of “failure to deliver” lawsuits.

Keep in mind that this whole thing — this whole concept of an infinity squeeze — revolves around the concept of a short book greater than 100% of the float, and not enough shares available to get out.

Robinhood would have been on the hook to deliver hundreds of thousands of GME shares it didn’t have, at far higher prices, if the squeeze truly took hold and thousands of additional call options were exercised.

That prospect scared the living daylights out of Robinhood — and its clearing firm — and so they suspended the ability to buy shares and calls.

Had Robinhood explained what really happened, it would have been an open admission that the Reddit army had come within minutes of pulling off the squeeze, and breaking the system in the process.

The effect would have been like waving a bloody pork chop in front of a pack of starving pit bulls. The Reddit army would have heard “you almost won” and tripled down on its efforts.

Robinhood was actually put in a nightmare situation. They couldn’t admit the real reason they blocked trading — but in refusing to speak clearly about their actions, they created a perception that might kill the firm anyway (the appearance of favoring hedge funds over small investors).

The whole GameStop saga is one of the most fascinating things to ever happen on Wall Street.  And a great example of an infinity squeeze.  In a future post, we’ll take a look back at the 2008 Volkswagon Infinity Squeeze.

In the meantime, if you are ready to get off of the sidelines, set up a FREE consultation with us here:

Credit to TradeSmith for the content of this post.

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