Short squeeze on volkswagen causes shares to rise 2000%

KorkyKat

I haven't stopped laughing since I read the first post and heard the news. The German word schadenfreude is appropriate.

It's going to make me happy right through Xmas and into New Year that a bunch of greedy gamblers got burnt by the Germans.

As ex Deputy Chancellor of Germany, Franz Munterfering said:

"Some financial investors spare no thought for the people whose jobs they destroy. They remain anonymous, have no face, fall like a plague of locusts over our companies, devour everything, then fly on to the next one."

Not this time lads. Go hang by your red braces.

justaquickie

I'm organising a whip-round for the hedge-fund managers who got burnt.

Please pledge your donations below.

mark99

Can you explain this is very simple terms? what happened?

I could do with a laugh at speculators expense.

Rgds

Mark

itsmickdundee

mark99 wrote: »

Can you explain this is very simple terms? what happened?

I could do with a laugh at speculators expense.

Rgds

Mark

Ok, basically "shorting" or "going short" is where you "bet" that the share in a particlar company is overvalued and, as such, will begin to fall by some amount.

It works by the short-seller "borrowing" or "renting" the securities (shares) to be sold, and later repurchases identical securities for return to the lender. If the security price falls as expected, the short-seller profits from the difference between the lower price and the higher price they "borrowed" the shares at. So in very basic terms, you short one stock which is trading at £1 a share. It drops to 50p. You then close your short position. You've made 50p. Now invest hundreds of millions and you can see how much money can be made... But if the security price rises, the short seller loses by having to pay more for them than the price at which he or she sold them.

If the price RISES - the losses are UNLIMITED - and arguably you can lose a lot more than you can gain. So if the short position is not closed (that is, the "borrowed" shares are not sold at their current price), the losses go up with the share price.

Shorting is rife with hedge funds. Arguably, it has been used to "bully" company share prices into submission, making some fall by a huge amount as speculation mounts that the share price needs to be "corrected" - i.e. go a lot lower than its current price - even though the fundamentals of the company (profits/cash flow, etc) are as sound as they have ever been. You could call it insider trading of sorts - talking down a particular company in the city circles and the media to "tarnish" the company's image, get investors nervous and then the snowball should hopefully begin once everyone starts selling... And share prices go down with lots of sells and up with lots of buys.

Now, what has Germany done then? Well, Germany cannot stand such "underhand" dealings and they more or less do not allow short selling within their borders.

However, it doesn't stop other hedge funds or shorters from outside of Germany to short German-based companies.

VW was a particularly big and obvious target. Recession on the way means massively reduced sales as high-price goods like cars are often overlooked for everyday essentials.

So the hedgefunds started shorting them to the wall.

And then Porsche stroll in and said, no thank you, we'll buy 75% of the company. Supply and demand stays true with shares. And there wasn't enough of them. As soon as Porsche wanted to buy, so did everyone else.

There was a mad buying spree. With less and less shares to buy (supply) and more and a more demand, the share price ROCKETED a few hundred percent from an unnatural low due to the current credit crisis and shorting.

The big hedge funds didn't know what had hit them until it was too late! Imagine investing say £100million of BORROWED money - now short VWs stock. With their recent increase of a few hundred percent in the space of a day or so, you'd be looking at a pretty hefty loss (times it by 3, with interest!) once the alarm bells started ringing and you eventually closed your position.

So they have lost (probably) hundreds of millions of pounds. Which is easily enough to bankrupt even large financial institutions - less money has bust a lot of banks around the world. And remember these are just hedge funds.

Now, you could argue, did Porsche do this entirely innocently. I.e. low share price for VW = excellent buy opportunity.

OR, maybe the German government was laughing all the way to Porsche' head offices, telling them to "do it" as it would quite clearly - and now has - scared off most shorters from touching anything German.

Oh, and now the big hedge funds who were shorting VW have come kicking and screaming to the German government crying "foul play" by Porsche!

Hilarious.

As an interesting fact, Porsche has a VERY accomplished department within their business - a trading department. Amazingly, this makes them a HUGE amount more money (£4 billion last year) than any of their car sales.

So anyway, big hedge funs got burnt. It's funny as the kids have come home crying despite throwing the first punch - but then ended up on their a$$es.

Shorting is not always a bad thing, but the fact that hedge funds have by their very nature played a big part in the current credit crisis (borrowing money they could never afford to pay back by investing it, investing in bad assets, shorting) they are obvious fall guys for who is more to blame and was the bigger of the bad wolves in the whole debacle...

tradetime

Let's hope pension funds don't make too much use of hedge funds.

Can you explain this is very simple terms? what happened?

I could do with a laugh at speculators expense.

Rgds

Mark

Not sure how simple, but I'll have a go.. Couple of players to understand here.
Options sellers, sell an options contract to a buyer giving him the right (but not the obligation) to buy a set number of shares per contract at a set price at some time in the future. If the options contract is "exercised" by the buyer, the options seller must sell the shares to him. at the specified price, either from his own holdings or he must go into the market and buy them at current price. (I have blodened because this refers to "naked" option selling, an activity carried out by many options speculators who believe the contracts they are selling will expire worthless, and I suspect these were the culprits). Generally, if you know what you are doing it's a reasonably profitable strategy as the majority of the options you sell are bought by speculators, or just hedges against something unexpected and they expire worthless.

Short selling involves borrowing, in this case VW shares and selling them today, in the expectation of buying them back on the open market at a lower price to return from where you borrowed and keeping the difference less fees.
So in simple terms, I borrow 1000 VW shares today and sell at 550/share believing it will go down in price for which my account is credited with 550,000. If all goes well and VW drops in price to say 500/share I buy back in the market for an outlay of 500,000 and return the shares leaving 50,000 of the original sale price in my account.
In this case it gets a bit tricky as all the details are not out yet, but it seems a major shareholder, Porche had been accumulating call options contracts, which would give them the right to buy more shares at a set price within a certain time period, from those who were selling the contracts. (a substantial amount more)

Porche revealed it was buying with a view to increasing it's stake, this is a major problem for naked calls as they have to deliver shares, and given the size of the accumulation of contracts by Porche this would have forced options writers to buy shares in VW to make good on their obligation to deliver. It seems the float of daily circulating shares was quite small so this alone would likely have driven the shares up substantially and caused pain for the option sellers. However in this case there was a substantial amount of shares borrowed by short sellers (approx 12% of the total)
As the options sellers would have flooded the market to buy shares to cover their contract obligations, and daytraders would have jumped in buying to ride the up move, short sellers would have needed to cover their short positions, by buying shares as margin calls rolled in. Really to steal a phrase, "The Perfect Storm" Too many buyers chasing too few shares.

wagdog

mark99 wrote: »

Can you explain this is very simple terms? what happened?

How about this video explanation?

A lot of hedge fund managers were caught naked.

JohalaReewi

Why am i reminded of the film Trading Places ??