[whimsicalism]

Because of the expiration date of the short they sold and uncertainty over whether the price would continue to increase.

If you have to buy by EOD Friday and the price starts skyrocketing Thursday, you might want to buy a little earlier even if it means eating a huge loss, because you don't know if that skyrocket will continue into the next day.

e: Why is that downvoted?

[desertrider12]

Shorts aren't options, they don't have expiration dates. You can hold a short indefinitely just by paying interest on the borrowed share value when you entered the position. You can even keep the short from being forcibly closed during a squeeze by providing more collateral.

Put options do expire, but the worst case for puts is that they expire worthless. Regular shorts can have unbounded losses.

https://www.investopedia.com/ask/answers/05/shortmarginrequi...

[Leherenn]

I have to admit I'm missing something in this story. If the shorts do not have to sell, what's the endgame for WSB? Is it just the margin requirements will be too high, thus forcing lots of them to close their position? I see lots of references to the short squeeze happening tomorrow, so there must be something that force people to settle their position tomorrow?

[notSupplied]

What happens when the party you borrowed the stock from, seeing the new high price, wants to sell it to cash in on the fever? Can they not force close the position if the price moved up by some threshold?

[whimsicalism]

Sorry I misspoke.

Melvin Capital's short position was in the form of puts, I think.

Since they would expire worthless, better to sell them when it is skyrocketing than to wait and see it skyrocket further and lose all of your money.

[harambae]

>Melvin Capital's short position was in the form of puts, I think.

This is incorrect.

[whimsicalism]

Source? Here's mine [0]

[1]: https://www.institutionalinvestor.com/article/b1q8swwwtgr7nt...

[harambae]

https://www.cnbc.com/2021/01/27/hedge-fund-targeted-by-reddi...

You don't need an "emergency infusion of 3 billion dollars" if you just bought put options that are now deep OTM. As you mentioned, the total downside is capped at 100%.

They clearly had real exposure and serious panic. If they were using put options they were leveraged or had non-standard terms (not the same as typical retail investors)

[projektfu]

"Melvin’s most recent filing showed that it held 5.4 million puts on GameStop, valued at more than $55 million — an increase of 58 percent during the third quarter."

If it were just puts, then their exposure to a run-up would have been 55 million, not billions. Puts can only go to zero. The filing merely hinted that they were shorting the stock because they also had some puts on it.

Think about it, if you buy a $9 put for $10, the most you could lose is $10 when the stock goes way above $9. The unlimited loss scenario with options is writing (selling) a naked call, where you receive a premium but if the stock price rises above the strike price your loss rises.

Melvin's position must have been mostly short equity. Perhaps only a few million shares of a $3 stock.

[ROARosen]

The other commenter is right that shorts have unlimited risk, and put option are defined, but they can technically be short by selling calls which would make them expire-able.

But honestly I doubt it was even possible to be short so much with options alone on such a low cap company (as it was before this blew up)

[whimsicalism]

Is it wrong to call selling calls short selling? Regardless, I think it was puts that they were buying (so sorta the contrapositive).

[tartoran]

I don’t buy it. They’d try some tricks before capitulating. And look, it worked. Since RH stop allowing buys the price went down