The post below (which I found on Reddit) will bring some
clarity to the AMC situation. It is a fascinating read.
Copied from FB post by M.R found HERE.
For all of the new baby apes. I know a lot of you have questions, and
I thought it would be helpful to provide you with some overall context
to understand the significance of the movement you just joined.
Here’s the cliff note version. Covid hit last March and a couple of
big hedge funds concocted a plan to drive AMC into bankruptcy by
“shorting” it and make a ton of money in the process.
You “short” a company when you think the value of the stock is going
to go down. When the country locked down and AMC closed their doors
and their revenue literally went to $0 overnight, it was a no brainer
play for the hedge funds. NOTE: The main hedge fund here is
Citadel, whose CEO is Ken Griffin.
So they started borrowing millions and millions of shares from brokers
and sold them “short” at the market price at the time, and they
pocketed the cash from the sale. The idea is that the stock price will
drop, you can buy them back later at a lower price, and then return
the borrowed shares to the broker and keep the difference. If the
company goes bankrupt, the stock goes to $0 and they don’t have to buy
anything back at all and keep everything.
This is what they were banking on. They’ve done this to company after
company over the years, and they saw this as a sure thing as any.
Well a bunch of people on Reddit (affectionately known as “Apes”)
noticed they were trying to drive AMC, GameStop and many other retail
brick and mortar stores into bankruptcy, and banded together to buy up
all the available shares, driving up the share price. This resulted in
the mini squeeze in January. But Apes didnt sell after that. And the
hedge funds didn’t cover their short positions either (I.e. buy back
the millions of shares they had borrowed and sold short).
The Apes kept buying and buying, and holding and holding, and once the
real shares were all bought up, the hedge funds doubled, tripled and
quadrupled down on their short position and started making synthetic
shares (IOUs) and selling those shares into the market trying to drive
the price down. When the price dropped, instead of selling like the
hedge funds wanted them to, Apes said “thank you very much for the
discount” and kept buying more and holding. Nobody has sold for the
past 5 months since the movement really got started in January, and
more and more people are jumping in and adding more everyday.
Now because of all of the synthetic IOU shares the hedge funds have
created to keep shorting AMC, us Apes likely own more way more shares
than are actually supposed to exist (as much as 6x-8x by some
estimates). But real or synthetic, each share the hedge funds sold
short is a liability on their books that must be bought back in order
to close out their position.
They literally have hundreds of millions of shares, possibly billions,
to buy back, and we own them all. They have to buy them back
eventually, and every day that the borrowed short shares are still on
loan, the hedge funds are paying interest to the brokers they borrowed
them from. Meanwhile it costs us nothing to hold.
Things started to come to a head in the first half of May when the
interest rate on the borrowed shares was reported to be as high as
250% (1-2% is normal for your average stock), so the hedge funds were
collectively paying hundreds of millions of dollars every day just to
hold their position, and a couple of the smaller ones were starting to
miss payments. That’s when we went from $9 to $17, as those little
guys decided they couldn’t take the heat anymore.
Now we’re at $56 and in the danger zone for the big boys. Not only so
they have to make their daily interest payments on their borrowed
shares, but their long (owned) and short (borrowed) positions are
marked to market every day (adjusted to reflect current share price),
and if their long positions aren’t enough to cover their short
positions to a certain extent, then the bank who lent them the shares
will get worried and demand that they return them immediately. That’s
called a margin call.
And that’s when the fun starts; when the squeeze starts (note, this
has not happened yet). At this point, the broker forces the hedge
funds to buy back all of the hundreds of millions (or more likely
billions) of shares they have borrowed and sold short, because the
broker doesn’t want the hedge funds’ recklessness to fall onto them.
And remember, the Apes own all the shares and aren’t selling. The
hedge funds can only buy a share for what an Ape is willing to sell it
for, and us Apes really love our shares.
Once the margin calls start, the computers just start buying back all
of the shares at the best available price no matter what that price
may be. They all have to be bought back. Everything must be settled.
And if the cheapest price an ape is willing to sell for is 1,000, or
10,000 or 100,000, well then that’s what the hedge funds will be
forced to buy the borrowed shares back for in order to close out their
Apes are going to hold and hold and hold driving up the price further
and further to make the hedge funds bleed as much as possible until
they are inevitably forced to buy back their millions of shares. They
will need to buy our shares, and we set the price.
And remember, it costs us nothing to hold. This movement has been
building for the past 5 months, but you just heard about it yesterday.
One thing Apes don’t do is set dates for the squeeze. Nobody knows
when it will happen, all we know for sure is that the math says it’s
inevitable as long as we hold.
I only see three possibilities as to how this all plays out:
1-AMC goes bankrupt and the hedgies win (please note this is not going
to happen. AMC has enough liquidity to last them through 2022 and the
most passionate shareholder base in the universe. Not to mention a
pretty badass CEO who has completely embraced the new shareholder
2-Hedge funds are somehow able to meet their daily margin payments to
avoid being margin called, and they strategically close out their
short positions over time, causing a sustained Tesla type squeeze over
a period of a year or more (remember, apes aren’t selling until we’re
at the moon).
3-Hedge funds will be margin called and forced to buy everything all at
once and we’ll have the most violent squeeze in the history of short
squeezes. The price is infinite as long as apes hold.
I wouldn’t bet on #1.
#2 will require patience.
#3 will be absolute insanity (and in my personal non-financial advisor
opinion is the most likely outcome). Either way, we’re winning the battle.
This beautiful movement is growing by the day, and we can hold longer
than they can.
Never before has anything like this happened where millions of regular
people have been able to band together to take on the billionaires who
have been screwing them over time and time again, and be able to
actually hit them where it really hurts. It is the big hedge fund
himself on the other side (you know the one) who has his hands in all
the retail brokerage apps to make sure our orders get routed to him to
fill. And then they fill them with synthetic shares that they don’t
even have and dig themselves even deeper. They created and marketed
easy access to the stock market to the retail investor because they
only saw the retail investor as prey. Just another way to bleed us
dry. They never saw this coming.
Like I said, everything will eventually have to be settled. Margin
calls are coming. And the SEC has already enacted several rules to
prepare as much as possible for the catastrophic fallout from this
event, and to make sure that something like this can never happen
again. The millions of little guys with an app in their hand are a
threat now, and I’m sure they’ll adapt to it. So this could very well
be a once in a lifetime opportunity here. Although I’m not a financial
NOTE: Below is one of the responses to this post on Reddit:
You forgot to mention that the SEC will vote on June 21st on whether
or not to trigger an automatic margin call for over leveraged hedgies.
If they do that then it’s over for them.
Margin calls have to be answered within 24 hours so we could see the
end of this by the end of the month.
If they don’t vote Yes then the only way this can go is if banks stop
covering hedgies asses as their interest debt will increase and be
more than their collateral.
They still have some fight in them though. They have been pumping and
dumping stock like CLOV and that other one (can’t remember the name)
just yesterday to raise money to put bank at ease and pay their
interest. They are very close to being screwed though.