The potential second coming of a GME squeeze is now being talked about. Again falling on the final week of the month as monthly and weekly options for GME both near expiry. In this article I will explain why this rise in price is likely to be another squeeze and not just the dead cat bounce GME has seen a few times over the last few weeks as the price continued to stay depressed.
The basic mechanics for this squeeze remain the same as the first. Buyers simply have to hold the price above a certain point and let borrowing fees increase as shorts bleed dry and are forced to cover their position. Which in turn forces the price up and forces more and more short sellers to cover their position leading to a rapid rise in price.
The key point here is for the squeeze to occur we need to see a sustained rise in price, one long enough to see borrowing fees rise. And as of writing this post (26/02/2021) this is the first time since the initial squeeze that this has been achieved. Fintel reports a rapid decrease in available shares to short along with an increase in borrowing fees from 1.1% to 12.78%. Now in the hay day of the first squeeze the borrowing fees reached over 80% but on the rapid rise towards the climax of the squeeze borrowing fees hovered around 30% for several days. A few more days of sustained holding by retail investors will recreate these circumstances.
Although in comparison to the first squeeze the short-to-float ratio is much lower. With the initial squeeze seeing 140% of the float being shorted and this time around Ortex reports less than 40% of the float being shorted. Although these figures may become quickly outdated as yesterday (25/02/2021) we saw a short volume of 33 million. Regardless the short interest remains high and definitely high enough to see a squeeze especially with all the new shares shorted.
As with the first squeeze we see our first major increase in buying pressure coming off the back of a likely gamma squeeze. The circumstances for which now match that of the first. The gamma squeeze is a rise in price caused by sellers of option contracts being forced to cover the execution of the contract by buying the underlying security. As weekly and monthly options expire the higher the price of GME as the market closes on Friday the more options will be in the money forcing more shares of GME to be purchased to cover the sold calls on GME.
This makes today an interesting day for the future of this second squeeze but at the same time not the deciding day, As when compared to the first squeeze the borrowing fees haven’t reached a high enough level for the climax to be so soon. In all likelihood the gamma squeeze will play a part in helping move the squeeze forward but it might not trigger the squeeze instantly. Regardless it’s an important event that will help retail investors who are betting on a short squeeze immensely. So today remains an important day to watch the stock but not the deciding day.
There is also speculation on how much of the short position this time around is held by retail investors who tried to make money on the downtrend of GME after it’s first squeeze. That is an important factor to consider as that number in all likelihood could be much larger following all the attention GME received in late Jan/ early Feb. And a higher number of retail investors shorting ironically is good for the squeeze as they lack the capital to withstand the rise in borrowing fees the way hedge funds can.
Regardless although all the circumstances are right for GME to squeeze again the process for the squeeze to take place is still in its early stages and will require buyers to hold for multiple days and slowly watch GME rise. Maybe as much as 20-50% a day like the run up for the first squeeze maybe more maybe less. But it won’t happen over the course of one day and with how fickle investors can be, this is the only major point of concern for those seeking a GME squeeze.