GameStop Deja Vu Hits the Tape this Morning
The kitty is ready to pounce again with GameStop (GME) deja vu hitting the wire this morning. The party that keeps on going! "Never go short, when the kitty roars!"
Since the last squeeze, Ryan Cohen has been appointed CEO, the stock went through a 4:1 split, and GME has done a $1 billion share offering.
Is this squeeze here to stay?
As options get closer ATM (at the money) and ITM (in the money), the options delta exposure increases. Gamma exposure is highly dependent on expiration—shorter duration options have much higher gamma exposure. In a near-term expiration, say a weekly or daily expiration, ATM options can go from 50 delta to 100 delta rather quickly on relatively small moves in the underlying—that’s gamma. For further-options, that change is much less violent: The option might go from 50 to 55 delta.
The second aspect of gamma is the value of the stock itself:
As a stock goes up, the delta of the option increases in notional value. It means that if you are long 100 delta at $10 a share, that position has a notional value of $1000. If the stock goes to 30, that is now a $3,000 notional value position. So not only does gamma effect exposure to the shares, but the actual size of the position can also become increasingly large the higher the stock goes. This tends to accelerate the upside movement as the overall exposure increases. This is why gamma squeezes tend to be to the upside.
This of course, is flipped to the downside. As stock prices fall, notional exposure also falls—but this can still add fuel to the downside movement.
The mechanics of gamma make short positions inherently risky. In the case of GME, call premium trades at almost 10x compared to equal distance puts. This is an effect of both gamma and implied volatility. With such high vol the short term pricing of options skews significantly to the upside because the stock has a floor of zero and a potentially infinite ceiling. Thus short calls or short call spreads carry too much risk for most traders.
As the effects of "negative" gamma play out to the downside, decreasing volatility and stock price reduce the notional value of puts. This drags on the profit potential of downside long puts, making them difficult to profit from unless a large downside move is realized.
These two factors make exchange-traded funds (ETFs) like XRT more interesting as a proxy trade. The SPDR S&P Retail ETF, which includes many of the recent meme moves in GME and Carvana (CVNA), among others, which are now a much larger weighting of the ETF. As a lesser volatility underlying, short calls, call spreads, or even synthetic short stock position like a Zebra or ITM long put are a highly correlated way to play the downside.
To play the upside—YOLO those calls friends!
Nick Battista, tastylive director of market intelligence, has a decade of trading experience. He appears Monday-Friday on Options Trading Concepts Live. On Wednesdays, he co-hosts Johnny Trades. @tradernickybat
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