Gamma Squeeze – Explained
Shares of AMC Entertainment Holdings Inc. (NYSE:AMC) halted trading four times yesterday after spiking more than 90% – yes, you read that right – 90% – all in one trading day.
The “meme stock” opened on Wednesday morning at $37.53, an all-time high that it wiped out just a couple of hours later, surging all the way to $72.62 at one point mid-day.
Now, AMC isn’t a stranger to these volatile spikes. It was second only to GameStop Corp. (NYSE:GME) during January’s “retail revolution,” when Robinhood traders on Reddit began pushing stocks into violent short squeezes that sent shares flying high.
Even then, AMC spiked only to $19.90 – which, at the time, was an 890% year-to-date (YTD) jump.
Today, AMC is up over 2,800% YTD in an almost unheard-of surge…
Leaving investors and traders alike to wonder one thing: what happened?
Because listen up – this quadruple-digit increase isn’t just due to retail traders on Reddit. It’s not solely because of hedge funds buying up thousands of shares either.
What we’re seeing on AMC is more than just a short squeeze.
A short squeeze occurs when people who have shorted a stock are forced to buy the stock back, therefore pushing up the price of the underlying – which is exactly what short-sellers don’t want to happen.
A gamma squeeze is similar. It’s essentially forced share-buying that’s triggered by heavy short-term call open interest on a rallying stock.
See, this week, a large institutional trader bought up 60,000 AMC $73 call options that expire this Friday, June 4. That’s exactly the kind of heavy open interest I’m talking about.
Now, as of Tuesday’s opening bell, AMC shares were trading for about $31.85, making these calls more than $40 out-of-the-money (OTM).
Who in their right mind buys an option that far OTM? No one – unless, of course, they’re trying to create a gamma squeeze…
Which is exactly what they did.
See, when you’re buying an option, you’re likely not buying it from another individual investor. Instead, the person selling you that option is a market maker.
If the market maker is selling a put, then they’ll hedge their bets by shorting the stock. But if they’re selling a call, like the situation above, then they’ll hedge their bet by buying the stock.
You see where I’m going with this?
Someone bought 60,000 call options on AMC – meaning a market maker somewhere is going to end up buying up a ton of AMC stock.
How much stock? Well, we have to take the delta of the option, which is .08. Then, we multiply that by the number of call options bought – 60,000 – times 100, since each option contract is equivalent to control over 100 shares of stock.
But you don’t have to get into the nitty gritty of the mathematics behind it. Just know this – that equals 480,000 shares. That’s how much the market maker had to buy.
And that’s 480,000 shares that put AMC into a gamma squeeze that catapulted it to an incredible, single-day, 90% increase.
This is the same thing that happened at the start of the GME story – meaning it’s possible AMC is just getting started.
VIX Traffic Light
Despite the VIX’s spike to 18 yesterday, my traffic light remains red – and likely will for the rest of this week.
See, this is just a short-term blip – I still see volatility heading down longer-term, dropping below 15 by the Fourth of July…
And bringing our UVXY put position to a fast asymmetrical gain.
Track that position – and the rest of the trades in our portfolio – right here.
Speaking of volatility – the five stocks I’m about to show you are some of the most volatile on the market today…
Mark’s Watchlist: Meme Stock Edition
AMC may be hitting the most headlines, but retail traders are moving other meme stocks this week too – I’ve got over 30 on my watchlist today.
- Express Inc. (NYSE:EXPR) $5.09 (-21.81%)
As of yesterday’s close, EXPR had run up 60% in the past five trading days. The retail company has certainly attracted the attention of Reddit traders – plus, its first quarter earnings report exceeded the company’s expectations, signaling strong fundamentals beyond simply social media interest.
- Nokia Oyj (NYSE:NOK) $5.54 (+1.65%)
Since landing on my Watchlist on Tuesday, NOK has risen over 4%. It may not be the same skyrocket we’ve seen from AMC, but at $5.45 per share, this telecom company is quickly approaching the $6.55 high it hit back at the end of January the last time Reddit traders took the reins.
- Sundial Growers Inc. (Nasdaq:SNDL) $1.41 (+24.68%)
SNDL sits at just $1.35 today, making it the cheapest stock on my Watchlist. Just five trading days ago, however, this pot stock was at $0.81. That’s a 66%-plus increase – likely thanks to more than just social media popularity. Amazon.com Inc.’s (Nasdaq:AMZN) announcement in favor of the legalization of marijuana pumped up pot stocks across the board yesterday.
- Workhorse Group Inc. (Nasdaq:WKHS) $13.74 (+19.23%)
Shares of WKHS surged more than 20% before market open this morning, landing WKHS a spot in the kingdom of meme stocks with no other specific news to explain the quick jump.
- Blackberry Ltd (NYSE:BB) $16.18 (+6.17%)
BB is quickly following in AMC’s footsteps, up almost 95% from a week ago today. And as Reddit users push this phone maker sky high, I’m keeping a close eye on just how high it can go.
This may have been a shortened trading week, but a ton has happened – and it’s not over yet. Tomorrow, I’m going to answer any questions you have about this week’s trading – be it about UVXY, oil, meme stocks – in a special edition of Ask Me Anything.
And you may just find an answer in tomorrow’s Profit Takeover issue.
June 03 2021