Gamestop: Power to the Market Players (Part 2)

Wew laddy, +71.25% at the peak.
  1. Personal name recognition/Nostalgia-For better or worse, we all know/remember Gamestop (primarily from childhood), which is similarly why Hertz performed so well in the afterlife while Mallinckrodt hasn’t.
  2. A hero and a villain — Much like Tesla, Ryan Cohen represents the hero in the Gamestop narrative, where investors can paint whatever picture of the future they want and justify whatever price tag they pay. Similarly, Melvin and Citron (I mean, even the name Melvin) and the hedge fund industry are (perhaps well-deserved) villains in the arc, helping obfuscate feelings of greed or risk by presenting it as a righteous cause.
  3. A cataly-ish — For obvious reasons Gamestop is benefiting from the console cycle, but perhaps to a lesser degree than before (its massive real world presence during a pandemic doesn’t help much).
  4. Humor-What could be more funny than investing in a relic of the early 2000s? Except maybe investing billions into 3d renderings of hydrogen powered cars.
  1. Long options have asymmetric risk-reward, assuming risk-loving participants.
  1. Spot price (gamma)
  2. Time to expiration of the option (charm)
  3. Volatility of the underlying (vanna)
Source: quantik.org

0 Days to Live

0dte options have long been a mainstay of the dopamine addicted day-trader community (including me, sometimes) given they represent the purest form of lottery ticket:

  1. They expire at the end of the day — You don’t need to go to bed and worry about your position, because it’s either closed or worthless.
  2. They’re cheap, generally-Theta in particular becomes exponential for 0dte options, and you can quickly buy positions on sale just to gamble as the end of the day grows closer.
  3. They still represent implied leverage and have that tasty convexity-Like their more respectable brethren, 0dte options still represent the underlying and have all the neat Greeks (gamma, delta, vanna, pajamas, etc.) which make their payouts non-linear and fun.

Let’s Imagine a Scenario Here

Let’s imagine you have a high implied volatility stock that has been stable/slightly declining in price for multiple days. During that time period, theta is aggressively destroying the value of long options, while IV is similarly dropping (both due to theta and due to relative lack of movement). As we get to the final day (this is a weekly, for example), much of the option’s value has now disappeared.

  1. Theta and charm become more and more prominent in both making new option positions cheaper and unwinding existing put and call positions.
  2. Gamma starts to become more dominant due to the high implied leverage versus cost of 0dtes, leading to the virtuous cycle (option buying begets option buying).
This is fine.
Although more puts traded, the delta (for obvious reasons) of calls is much higher.
  1. The price of the underlying continues to increase as put hedges unwind, volatility spikes, and call options are bought (the initial delta hedge).
  2. The increase in price leads to gamma of existing contracts increasing the delta of those contracts.
  3. This leads to more shares being bought to hedge those increasingly higher delta positions.
  4. This leads to more speculation and momentum.
Source: quantik.org
57.99 is such a pretty number.
  1. In general, gamma squeezes tend to happen closer to OPEX, due to both hedge unwinding (in the case of a previous put skew, for instance) and due to the 0dte effects mentioned.
  2. In general, there is both a rapid rise (due to gamma looping and speculators joining) with a similarly steep cliff (especially if the available strikes is exhausted, like what happened to $GME).

Can it be continued forever, though?

In general, the answer unfortunately is yes.

  1. Continued supply of strikes and promise of convexity — Put gamma squeezes rarely happen because well, the maximum value of a put option occurs when the underlying hits 0. Calls, however, have an infinite potential payoff and strikes similarly can be added indefinitely. This allows continued creation of OTM options, which due to cheap premium and asymmetric risk-reward on longs power the gamma squeeze.
  2. Continued momentum-In general, meme stocks follow the greater fool theory, despite promise of rocket emojis. When they drop, they drop hard.
Oopsies.

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