Billions: The Short Squeeze

All Rhoades lead somewhere and if Senior doesn’t stop trying to help Junior soon the only thing he will be watching is his son’s career go down the drain and he will be doing it from a prison cell.

Many thanks to Lady Trader for her help ensuring we have it right. It is greatly appreciated.

There is so much going on in this episode but Damianista and JaniaJania have that covered. Let us talk about the episode title. The short squeeze.

What is a short Squeeze?

Short Squeeze’ – you have a Company whose stock is not doing well and so people ‘Short’ it. There is suddenly some good news and the stock price rises. This means that anyone who shorted will have to cover their position at a higher level and will take a loss.

What Chuck Rhoades Senior does in this episode is to get friends to buy in on Cross Co thus giving the impression Cross Co was worth buying into. They ‘artificially inflated the price’. They propped it up so to speak. He did so with inside information which is what lands him in hot water with his son. In addition to enlisting the help of his friends, Chuck Senior also has an analyst upgrade the stock to an outperform, with a $90 price target. This alone would move a stock. When an analyst puts an “outperform” or a “strong buy” on a stock, they believe the stock will outperform the market significantly. It means its one of their top recommendations. The price target indicates where the analyst thinks the stock will trade in the next 12-18 months. Any upgrade of a stock, that has a short position, even if not many people buy the analyst reasons, would automatically get squeezed.

Definitions to remember when thinking about a short squeeze:-

Short or ‘short position’ is where you expect the value of stock to fall. You borrow this stock rather than own it. You then sell it. However, you must later buy the stock back.

‘Covering’ is the term related to the short position. That is, when you short, you are selling the stock on the basis you expect it to fall in value and thus when you buy it back or ‘cover’ you expect to do so for less than you sold it and make a profit. However, if you get it wrong and the stock price rises, you must still cover the position and will take a loss.

Upgrading/downgrading of stock by Analyst –  An analyst on the Sell Side (they sell their reports on companies to Asset Managers and to Buy Siders, like I was) will change his/her rating on a stock when they think something fundamentally has changed in the stock. For example an analyst may have a Buy recommendation on stock X, but he/she thinks that people who are cord-cutting their cable will have a negative effect on stock Y (owned by Stock X) and the revenue they bring in. An analyst may put out a report downgrading the stock to Neutral (don’t buy, but don’t sell), or Sell or Underperform since the fundamental story on Stock X has changed, and the analyst believes growth will be harder for X.

We also have a Glossary which you may find useful.

We did tell you in The Long and Short of it we had our eye on this episode title and we’re back with our T-Shirt examples.

Example – Short Squeeze –

Billions has 10,000 short sleeve Chuck Rhoades Bury the son of a bitch’ T-shirts at $15 each.

Never one to miss an opportunity Bobby intends on doing just that. Why argue with a T-Shirt? Bobby gets in there early and sells these T-shirts at $15 each before anyone can realise they relate to the ‘crusty old bastard’.

source: Showtime
source: Showtime

Now everyone is left with T-shirts they want little to do with. I mean, come on, even his own son is reluctant to take Senior’s help or advice. If these people are very lucky, Bobby may be willing to buy the T-Shirts back at $2 each…maybe!

However, Chuck Senior isn’t just going to take this lying down. He invokes the help of friends and gets them to start buying the T-Shirts. The T-Shirts start popping up everywhere and to Bobby’s irritation people decide they must have one. He also enlists the help of an analyst to upgrade the stock to strong buy. The stock price is forced up the way to $20. This is bad news for Bobby.

Bobby shorted the stock which means he does not own it. He borrowed it from the broker. Now, with the price rising Bobby will be expected to cover his position. What this means is that Bobby sold at $15 expecting the stock price to fall. However, the stock price is now at $20. This is the short squeeze, the price being forced up. Bobby now has to ‘cover’ the difference which is $5 per T-Shirt which means that Bobby has to stump up $50,000. He then has to decide whether to remain invested or get out. If he stays he runs the risk of further increases in the stock price and further covering. The smart play would be to get out.

We are going to leave it there because although we know that in the episode Bobby successfully overcomes the short squeeze, this example is solely related to the actual short squeeze.

We hope this was helpful. Let us know if there is anything else you would like us to cover.

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