Disclaimer: This article is not a professional analysis of the current market situation. I am just a high schooler who enjoys researching about market finance even though I may not thoroughly understand it. All facts claimed in this article are subject to biases and can be misinterpreted. This article should not be used as a basis for researching about any investments you plan to take. It is just my view of the market. Please take everything stated here with a grain of salt.

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Earlier this year, around mid January of 2021, a financial fiasco took the world by storm: the GameStop (GME) short squeeze. Redditors from r/WallStreetBets gathered together to start a pump and dump scheme on the GME shares on the stock market. But what exactly happened? Well first, we need to learn more about options.

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Options - calls vs puts

The term option refers to a financial instrument that is based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Each contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price.
There are two primary types of options:
Call options: A call option is a contract that gives the owner the right, but not the obligation, to buy a stock at a future date, at a predetermined price, also known as the strike price. Call options result in profit when the market is bullish. Example: Stock X is trading at $2.00 per share. If a buyer buys the right to a call contract with an expiration date of 3 months, he can exercise the option anytime within the 3 months. In 3 months, stock X rises to $2.15 per share. The buyer can now exercise the option at the strike price of $2.00 (or maybe a little bit higher) by which he will hold $2.15 worth of shares at the cost of the strike price or $2.00 in this case, profiting a total of $0.15 per share. However, if the stock prices go down, the maximum the buyer can lose is the premium paid to acquire the call option right. For simplicity, all other transaction fees are ignored
Put options: A put option is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame. This predetermined price at which the buyer of the put option can sell the underlying security is called the strike price. Put options result in a profit when the market is bearish. Example: Following up from the previous example, let's say that a trader acquires a put option for stock X at $2.00 as the strike price. The broker will lend the "stocks" or the option to the trader which the trader will sell at $2.00 per share. If anytime within the time frame, the stock price drops below the strike price, the option is said to be "in the money". Let's say the market value of stock X drops to $1.75 per share. The trader can then exercise the put option, buying back the shares at $1.75 per share and profiting the difference at $0.25 per share. Keep in mind that by buying back the shares, the trader does not exactly own the share because he did own any of the shares he sold in the first place. He is returning back to the lender or the broker. However, if the stock value go up, the trader will have to cover the losses.

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Now that we have a basic understanding of what options are, let's get back to the focal point of the story.

r/WallStreetBets vs Hedge funds
The scheme for this surge began all the way back in 2019 where redditors started to buy call options on the GME stock. GME or GameStop was not doing really well and hedge funds, primarily Melvin Capital started to buy put options or to short the stock. As the COVID-19 pandemic came around, many more redditors joined the subreddit who, under the influence of boredom with being stuck in home, started to follow the trend. This upwards trend skyrocketed the share price of GME by over 300% by January, at which Melvin Capital needed a $2.7 billion bail out.

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you might be having a bad day, but at least you’re not some hot shot wall street suit that has to tell his boss they lost billions because of some meme bros on reddit

— MJ (@morganisawizard) January 27, 2021

But why did redditors do this?
The true motives behind their intentions may not be that much of a mystery. Even though on paper it might seem to be a classic pump and dump scheme to artificially inflate the share price, the truth is that the Security Exchange Commission can not provide any type of evidence since no insider knowledge was shared and investors have the right to discuss with one another, whether through casual conversation or an online forum like reddit. Sure the people from WSB wanted to earn money but in fact their motives might go deeper than that. It was about sending a message. It was about showing how hedge funds themselves artificially inflate securities to favor their positions. It was about how the financial institutions is responsible for the 2008 market crash yet it is the common people who has to suffer.