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February 27, 2020 02:02 am

Reddit's Profane, Greedy Traders Are Shaking Up the Stock Market

Bloomberg's Luka Kawa reports on the tips and tricks members of the r/wallstreetbets subreddit are using to push prices on the stock market, at least for the short term. Here's an excerpt from the report: The do-it-yourself traders of r/WSB are waging a kind of guerrilla warfare in the markets, trying to exploit what they see as weaknesses in the system to move prices where they want them. For anyone who wondered about where the small day traders who made the 1990s so wild went, meet the 2020 version. After years of indifference, individual investors seem to be finding their way back to stocks, for better or worse. They're flexing muscles in ways that can easily call to mind excesses from the dot-com era. Members of r/WSB believe they've discovered a kind of perpetual motion machine in the interplay of stocks withÂoptions contracts, which offer a cheap way to bet on whether shares will rise or fall without buying the stock itself. It goes like this: Members make bets that rely on market makers, the professional middlemen who sell you a call (a bet on shares rising) or a put (a wager on a decline). Market makers, like good bookies, don't want to go out on a limb. When taking a bet, they lay off the risk. If someone buys a call, for instance, speculating on a rally, the dealer buys stock in the underlying company. If the stock rises, the dealer may have to pay out on the option -- but that's offset by the gain on the shares. When shares keep rising, managing the hedge entails buying more stock. That's where the Reddit set perceives a weakness. A favorite tactic on r/WSB is to swamp the market with call purchases early in the morning in an attempt to force dealers to keep buying stock. Up and up everything goes -- supposedly. As the stock price rises, so does the value of the calls, often by far more...

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