GameStop is a primary example.
Since its 2014 inception, investment firm Melvin Capital Management had been short GameStop, expecting the stock price to fall as digital downloads of video games overtook its brick-and-mortar business.
The precise size and entry price of Melvin’s position weren’t publicly disclosed, so the figures here are a hypothetical illustration, not Melvin’s actual results. For example, consider shorting 1,000 shares on Jan. 22, 2021, at $65.01 per share. By the Jan. 27 close of $347.51 per share, up roughly 435%, that position would show a $282,500 paper loss before fees, more than four times its $65,010 notional value. Held to the Feb. 4 close of $53.50, it would instead show an $11,510 gross gain.
Melvin did not ride that path. Gabriel Plotkin, the founder of the firm, later said Melvin closed its GameStop position on Jan. 26Â before the peak and at a loss, with its thesis unchanged. In February congressional testimony, he added that Melvin also cut other long and short positions at significant losses. The eventual gain was unavailable to a manager forced out during the surge.
The lesson is that surviving the interval can matter as much as the valuation call.
