The same rule applies whether you are playing the tables or the markets: betting against the house can pay big until, all of a sudden, it doesn't.
Short sellers who bet against shares of Macau casino operators amid the massive rout that began last Friday paid the price yesterday, as gaming stocks rebounded across the board by 15 to 26 per cent.
The rally brought an abrupt end to the sell-down that erased 30 per cent, or HK$135.5 billion, of the market value of the six companies licensed to operate casinos in Macau.
For short sellers - who borrow shares in companies from brokers and sell them, in a bet that the stock can be bought back at a lower price before it is returned - the squeeze was epic.
Shares in casino operators soared, led by Sands China with a 25.7 per cent gain, as short sellers rushed to cover their positions. Analysts had anticipated the pinch, with strategists at Societe Generale yesterday morning ranking Wynn Macau as No 2 on their list of 'top short squeeze candidates' as ranked by market value. Wynn's shares ended the day 20.5 per cent higher.
Following Wednesday's public holiday, the market was also playing catch up with Tuesday's news that casino revenue grew 38.8 per cent last month, partly easing fears of a credit crunch in the dominant high-stakes gambling segment.
'The casino revenue figures were quite encouraging for September and that also helped trigger the short covering,' said Alex Wong, a director at Ample Finance Group.
'For Macau stocks the short squeeze [yesterday] was already very severe, so the magnitude of further rises should not be too great.'
Those who bet against Macau chips and got out before yesterday's squeeze stood to profit handsomely, according to figures from Data Explorers, which tracks short selling volumes by compiling data from hundreds of institutions who lend out their shares.
As of Tuesday, settlement of short trades in Macau casino firms - as a percentage of their total shares issued - had climbed to 1.95 per cent on average, indicating short interest in the sector was up around a third from its levels a week earlier (see chart).
Given the recent volatility across the market and the steep slide in the Hang Seng Index, a number of local brokerages have issued calls for the government to consider restrictions or a ban on short selling.
But secretary for financial services and treasury K.C. Chan rejected this yesterday, saying: 'When markets fall, it's not like we can stop it by just banning short selling. Shorting activities are so far relatively normal and we're keeping a close watch.'