Which Call Contracts Facilitate A Gamma Squeeze The Most For GME

This article assumes a basic understanding of what options are, if you need a quick breakdown you can read up on them here. A gamma squeeze is a rapid rise in price caused by sellers of option contracts having to hedge against the risk of the contract exercising by buying the underlying asset. This drives up the price of the asset as the buying pressure on it increases causing more contracts to need hedging. A feedback loop that keeps forcing the price up to a point where the contracts are sufficiently hedged.

In the case of GME, to understand which contracts will most facilitate a gamma squeeze you need to understand the mechanics of a gamma squeeze and who is selling you these contracts.

Who Is Selling Me Options?

Unlike when trading normal stocks, when you buy an options contract you usually aren’t trading with another individual investor, but rather a market maker. This is an important detail as market makers when selling contracts use a sophisticated pricing model called the Black-Scholes options pricing model. They use this model to figure out the price the contract should trade at and then factor in an additional premium to claim a profit on the trade.

Along with helping to model a price for the option contract, the Black-Scholes also models the risk associated with the contract position. Market makers use this to understand how to hedge their position based on the Greeks. The Greeks are a set of variables that help measure the sensitivity of an option’s price to various factors. But to understand a gamma squeeze you only need to focus on two of the Greeks – Delta & Gamma. (Explained Below)

Mechanics Of A Gamma Squeeze

To understand gamma, you first need to understand delta. Delta is the expected change in price of an option from a change in the price of the underlying asset. So, if a call option had a delta of 0.3, the price of the contract would be expected to rise $0.30 for every $1 the stock’s price increased. Delta changes depending on how close or far away a stock is from it’s strike price, this is illustrated in the graph below.

In the above graph you can see delta is flat at or near zero as the price of the stock is far below the strike price and it is flat and high as the stock price is far above the strike price. This is intuitive as if you’re really far away from being in the money, a dollar increase in stock price isn’t going to make the option that much more valuable. And if you’re very far above the strike price a dollar increase in the stock price is worth pretty much an extra dollar per share when exercised.

But what is worth noting is the steepness of the line as it approaches the strike price. This is when delta rapidly starts increasing and the line is at it’s steepest at the strike price. Gamma is the rate change of delta and is represented by the steepness of the line in the above graph. So, in turn gamma is at it’s highest as a contract is at it’s strike price. And very high when it is near it’s strike price.

What Does This Mean For GME?

Market makers use gamma to understand how much to hedge their position. As gamma rapidly begins to increase market makers are forced to start buying the underlying asset (or GME in the case of GME calls). So to see the greatest increase in gamma the price would have to approach the strike price. This makes the most valuable options in initiating a gamma squeeze those with a strike price near or slightly above the current market price. A high volume of call contracts purchased at this price range is more likely to initiate a gamma squeeze than buying calls far out of the money.

This also means that trading in your very in the money calls for calls that are far out of the money may likely reduce the chances of a squeeze. This is based on a separate but similar principal called delta hedging. If you have a call you bought on GME early with a strike price of 60 and now the price of GME is over 100, the delta on this contract is very high. If you then decide to sell this contract and buy a cheap out of the money call with a strike price of 150 or 200 hoping to make money on a rapid rise, you will then have given market makers the chance to buy back your in the money contract. And now you will own a contract with a much lower delta.

Similar to gamma hedging, how high delta is plays a role in how much market makers will have to buy the underlying asset to manage their risk. And by trading your in the money contracts for out the money contracts, you will be lowering the delta and essentially the amount market makers will have to hedge by (the amount of GME they will have to purchase).

When analysing the first GME squeeze with the price movement of GME now, this is the first time the price movement shows the chance for another potential squeeze. With high short interest, the price of GME sustaining a high long enough to increase borrowing fees significantly and the rise in price again coming off the back of a gamma squeeze.

However when compared to the climax of the first squeeze, borrowing fees are still low and the daily price movement rather resembles the price movement of GME during it’s build up to the first squeeze. In which we saw a slow rise in price and a slow increase in borrowing fees both accompanied by multiple gamma squeezes. The first forcing the price up from 20 to almost 50, the second shooting the price close to 100 and then two more proceeding the climax in late Jan / early Feb.

Regardless for people betting on another short squeeze it is important to understand how the options market will effect price movement as these variables are very likely to be the catalyst for another short squeeze if it does occur.

Chamath Palihapitiya’s Two SPACs With No Merger Targets – IPOD and IPOF

The king of SPACs, Chamath Palihapitiya, has recently filed for seven new SPAC names with the Securities and Exchange Commission through his company the Social Capital Hedosophia Investment Group. As expected they are Social Capital Hedosophia Holdings VII through XIII and will likely correspond with the ticker symbols IPOG through IPOM. Following his previous trend, Palihapitiya has previously claimed to have reserved ticker symbols from IPOA all the way to IPOZ.

It is still too early to think about the seven new SPACs as no initial registration statements (S-1s) have been filed. So we don’t know the board members, when they will go public or how much they are looking to raise.

However speculatively this has people talking about what this means for IPOD and IPOF. The two SPACs Chamath has yet to announce merger targets for. This is not only fuelled by his new filings but also speculation based on his tweets from the past month.

These tweets fit the early speculation that Chamath would be targeting an EV related company for one of his two remaining SPACs. This was also followed by a bizarre tweet from one of the SPAC board members.

The most talked about speculation is that IPOF may merge with Silano Nano Technologies. As it fits in the range of what IPOF’s trust likely has the capital to go for, as well as the type of company the current board members are suited to target. Although all this still remains highly speculative. So for the time being, we are for the most part still completely in the dark.

GameStop could potentially see another massive squeeze

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.

Is the Apple-Hyundai deal still on?

On February 8th Hyundai announced that it would no longer be working with Apple on an autonomous vehicle. After a month of negotiations that looked to be close to materialising to a deal in which Kia (owned by Hyundai) would produce the Apple car at a factory in Georgia.

However after concerns from Hyundai executives over becoming just a builder of Apple products like Foxconn and rumours that Apple wasn’t happy with the deal being leaked, Bloomberg released a report claiming the negotiations had been paused.

The Bloomberg report came out on the 5th followed by an announcement from Hyundai on the 8th: “We are receiving requests for cooperation in joint development of autonomous electric vehicles from various companies, but they are at early stage and nothing has been decided,” the automaker said. “We are not having talks with Apple on developing autonomous vehicles.”

New Information / Current Speculation

On the day the deal would have been signed (FEB 17th) Investors Business Daily released a video and article claiming that Apple had chosen Kia as its partner to produce the Apple car. But the video cited a Bloomberg article that cannot be found on the Bloomberg site and the article was only a paragraph long simply reporting the news.

So far no other news outlet has reported the story and Investors Business Daily has not responded to our request for a statement on their source for the news.

Although Investors Business Daily is a credible source this report remains unsubstantiated. Likely to be the result of an accidental automated release of a pre-written article as the news came out on the same day the deal would have been signed if talks hadn’t fallen through.

Regardless some speculators remain convinced that Apple will come back to Hyundai as they read in between the lines of Hyundai’s somewhat ambiguous statement. Relying on the fact that talks may be “paused currently” and the car being developed may not be autonomous. All this being speculated on the fact Apple likes to keep a tighter lid on their projects and likely used their weight to force a retractive statement from Hyundai.

Although as of now until Investors Business Daily releases a statement or any new information comes out about the deal investing or trading based on this information remains a highly, highly, highly speculative play.

Hyundai executives to be investigated over “Apple Car” deal

South Korean authorities are investigating whether or not Hyundai execs profited from trading Hyundai stock before reporting the “Apple Car” deal had been paused.

This report comes from Reuters claims the chairman of the FSC has told a parliament committee member that investigation may begin next week. “Reviews are to examine whether there is any suspicion (of wrongdoing) or not,” a spokesperson told Reuters. “The length of such reviews varies with each case, and the exchange will communicate findings to the FSC.”

Reuters estimates a total of 3400 shares were traded by insiders worth approximately $753,000