On February 25, GME traded 4 times the company’s total float. But then, on the 24th, the share price doubled in the final 90 minutes of trading, and then doubled again in the first half hour of the following day. We all thought it was the calm after the storm. The stock had been quiescent for the previous 2 weeks, drifting down gently. The new surge took off quite suddenly around 2:30 pm on February 24. The gamma squeeze – using options, with their inherently enormous leverage for creating pressure on the buy-side – was like adding gasoline and tossing a match.
So, essentially, in the January surge, the pre-existing short interest in GME was like dry tinder, ready to burn but hard to ignite. And if they can coordinate their option buying, they gain huge leverage by forcing the option sellers to buy shares – putting upward pressure on the stock. This means that “ordinary investors” - retail traders – can more easily participate. In the example developed in the previous column, based on actual market pricing, a typical 2-week call option for Tesla TSLA cost just 2% of the price of Tesla’s shares at the time. The other key fact is that options are much cheaper to buy than shares. It hedges this by buying something else that goes up in value as the stock goes up-specifically, the stock itself.” The more the stock goes up, the more the market maker owes you. “The market maker has sold you an option that goes up in value as the stock goes up.The net-net of the process, though, often requires someone to buy a share of the underlying stock – the call is converted at some point into a covered call. Without further measures, if the shares rise above the strike price, the option seller will have to acquire those shares in the open market, at a loss, to fulfill the contract. It works because when a trader buys a call option, it creates a risk for the counterparty who sold that option. It involves the use of options, specifically Call Options (that is, options to buy shares in the future at a defined price – called the strike price) to drive up the price of the shares. The basic idea can be stated in simple terms. Even the professionals failed in many cases to anticipate this development, which is why some of them lost a great deal of money. The mechanics of a gamma squeeze are complex (see the earlier column for details), and I doubt they are fully understood yet. What made the January surge in GME work was the addition of an innovative new tactic. Shares sold short all have to be bought back at some point (unless the company goes completely bankrupt) – so one way to view this was as an enormous reservoir of pent-up demand, a “coiled spring,” which if somehow triggered could propel the stock sharply upwards – inflicting huge losses on the short sellers.Īs described in the previous column, however, successful short squeezes are historically very hard to engineer, and therefore very rare. A short interest in excess of the float is not impossible, but it is highly unusual.Īnd unstable, as events showed. The entire public float (that is, the shares freely trading in the market, excluding shares held by insiders) comprises 45 million shares. At the beginning of the year, the short interest in GME - that is, the percentage of the company’s stock that had been sold short – was at least 68 million shares. There seems little doubt now that the top of the January surge was the result of a successful rout of several major short-sellers, who had become complacent (it would seem) with their thesis and taken on too much risk. My previous analysis highlighted two components of the January eruption: a short squeeze, and a “gamma squeeze.” The Short Squeeze
The “gamma swarm” phenomenon looks like something to be reckoned with, a new trading strategy that may require many other market participants – short sellers, regulators, market makers, clearinghouses, certain hedge funds, many conventional investors – to make significant accommodations. It is the type-specimen of a new kind of market maneuver, which will establish this event as more than an anomaly. In this column, I will examine this second surge in detail. Another “gamma swarm” – this time in its pure form, without the added “fuel” of an over-extended short position (the shorts were substantially cleared out by the January episode). This latest surge is revealing something truly new.
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