The strange ride taken by Avis stock
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Call it a CAR crash: The stock price of auto rental company Avis, whose ticker symbol is CAR, collapsed by nearly 70% over the past two days — after a run-up of more than 600%!
Why it matters: This was a wild short squeeze — investors who bet that the stock price would fall got cornered and were forced to buy their way out of a jam, driving the price even higher.
- Then it all came falling back to Earth.
The intrigue: None of this had anything to do with the business of renting cars.
The big picture: Still, the mechanics behind the scenes were different from what happened with GameStop back in 2021, when the "dumb money" kept bidding up the video game retailer's stock price, squeezing short-selling hedge funds.
- This time wasn't about retail traders, per data from Vanda.
How it works: When you short a stock, you borrow shares and then sell them.
- The bet is that the price of the stock goes down. So when it's time to pay back the shares you borrowed, you can go out and buy them again — for less money. You then pocket the difference.
- (Katy Perry albums can help explain.)
Catch up quick: Before all this got started, there were a lot of traders shorting Avis — the company is struggling.
- Then in an SEC filing on April 7, a hedge fund called Pentwater disclosed that it had built a 22% stake in Avis, including through call options, or options to buy.
- That meant whoever sold them those options likely had to go out and buy shares to cover it. That added demand for the stock, pushing up the price. Short sellers also needed to cover their bets, some by buying the stock again. That pushed prices up, too.
Friction point: But wait! Another hedge fund, called SRS, owned an even bigger 49% stake in Avis.
State of play: With two hedge funds owning the bulk of the shares, there wasn't much supply to meet the demand.
- "If 70% of the float is tied up by two holders, and neither of them are particularly eager to lend those shares, you have an instant short squeeze," explains Steve Sosnick, chief strategist at Interactive Brokers.
By the numbers: The stock peaked at $713.97 on April 21 and then started falling back, as presumably enough short sellers were forced out of their positions and there was nothing left propping up the stock.
Between the lines: Supply and demand can be a dastardly thing.
