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Screengrab of post on r/WallStreetBets from an administrator

A major aspect of the rise of stocks like GameStop is the use of leverage by hedge funds. The r/WallStreetBets crowd is using that leverage against them.

What it means: Because hedge funds are using borrowed money to place bigger bets, they have to exit positions at certain levels or risk losing potentially infinite sums of their clients' money and their own on short positions.

  • Conversely, call options, especially those that are far out of the money (above the stock's current price), are cheap. This gives the Reddit crowd an advantage.
  • Those leveraged positions also provide a tailwind because they help de-anchor a stock's price once a highly levered hedge fund has pulled out of its position.

The bottom line: Melvin Capital, which had vociferously taken a short position in GameStop, closed out that position Tuesday after taking a huge loss and received a cash infusion of nearly $3 billion from Citadel and Point72 to shore up its finances.

Go deeper: Understanding GameStop as a metaphor

Go deeper

Jan 29, 2021 - Technology

How Reddit explains the GameStop saga

Illustration: Aïda Amer/Axios

Retail investors’ battle against short sellers who had bet against GameStop and AMC — and other heavily shorted stocks with depressed share prices — offers a window into what happens when Reddit culture spills out into the real world.

The big picture: Reddit is a microcosm of mainstream internet culture, a massive clearinghouse for all sorts of interests that's populated mostly by young men with a vaguely anti-establishment bent. That's caused major trouble at times, but is now propelling a populist-progressive unity movement that's rattling Wall Street.

Stock market has worst week since October amid Reddit frenzy

Photo: Tiffany Hagler-Geard/Bloomberg via Getty Images

Wall Street had its worst week since October as day traders bid up stocks for GameStop, AMC and others that gained popularity on Reddit.

Details: The S&P 500 fell more than 1.9% on Friday. All of the major averages fell more than 3% this week.

Making sense of the GameStop circus

Illustration: Aïda Amer/Axios

It's probably fair to say that Thursday was one of the crazier days in the history of financial news.

What happened: Robinhood, which has become synonymous with retail trading and the parabolic rise of stocks like GameStop and Tesla, shut down the ability of its users to buy (but not to sell) some of the platform's most popular names.