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By Ross Kerber, April Joyner and Lewis Krauskopf
(Reuters) - Any pullback in GameStop Corp's shares potentially exposes some investors to losses. Those at risk could include people who bought the stock at recent highs, or on margin, and those using options trading strategies.
Shares of GameStop, which had seen a spectacular rally, fell 31% on Monday to close at $225, 53% lower than their Jan 28 peak of $483.
WHICH INVESTORS COULD TAKE A HIT?
Analysts worry some new or inexperienced investors could face losses if they bought in as the stock was peaking.
Particularly vulnerable would be those who bought "on margin," using money borrowed from brokers to buy extra shares.
The strategy can boost gains when share prices are on the way up, but magnify losses on the way down especially if brokers issue "margin calls" requiring clients to add money or face forced sales to bring an account's equity back to required levels.
Brokers are not required to notify clients when they sell shares in a margin call, "although most do so as a courtesy," according to the Financial Industry Regulatory Authority https://www.finra.org/investors/insights/margin-calls, the industry's self-policing body.
Riley Adams, a 31-year-old financial analyst who runs youngandtheinvested.com, a financial blog aimed at millennials, said if investors bought on margin late to the party "you're definitely exposed right now."
Thomas Peterffy, chairman of Interactive Brokers, estimated about half the platform's 1.2 million accounts are margin accounts. Thousands of margin calls occur on a typical day and the rate increased last week, he said. Peterffy said about 27,000 accounts had some sort of position in GameStock, and many positions liquidated were owned by traders who had shorted GameStock.
Representatives for brokerages TD Ameritrade and Robinhood declined to share details about how many clients may have traded GameStop shares on margin. A Schwab representative did not respond to questions.
However, Robinhood has restricted https://robinhood.com/us/en/support/articles/changes-due-to-recent-market-volatility buying shares, which limits investor exposure on its platform.
WHAT DOES THIS MEAN FOR TRADERS USING OPTIONS
Options bets on GameStop shares helped fuel the stock's breathtaking rally. Investors are gauging to what extent they could exacerbate a decline.
Some market watchers say a "gamma squeeze" - where market makers who have sold large numbers of calls to investors balance out their positions by buying the underlying stock - was a key driver of GameStop's sharp rally.