I'm afraid I can't remember the source, but some Twitter account I follow was making the case that while we associate retail with the 0DTE options buying, in fact a lot of it is institutional because it doesn't count towards overall on-the-book leverage? My terminology isn't quite correct there, but I think you know what I mean. I cannot verify these claims myself, but would be interesting if it's true.
Outstanding. That was the best description of a gamma squeeze I've read yet. I love your "J" illustration, so simple and concise. Not to be left out, yesterday I bought options for the first time in my life. Some June 30th puts on the SPX @ 3700, I am betting that the party is nearing the 4am closing bell. We shall see.
To preempt the "thanks for reading" response, I would like to say thanks for writing! This is written in such simple English that even a non-finance based professional can understand the concept. Thank you again for the effort you put into your content to keep the quality coming out week after week.
If you can’t explain it like you would to a fifth grader, it’s probably because you don’t have an “elementary” understanding of what you talking about.
I learned how to communicate to 5th graders by reporting to Managing Directors for many years.
I hardly understood a word of this but thank you for the detailed explanations, its why i dont invest as i have zero idea how i could be fleeced but am intrigued by the stock markets!
The good thing is it’s never been easier to invest in low cost, boring indices which will likely lead to better returns regardless. Thanks for reading!
Anybody know how many TSLA $190 calls were still open and in the money at the close? How many$200 calls expired worthless? I'm guessing it was a small % of today's volume in those calls...
No but compare the options traded vs the open interest. I have lots more questions than answers, yet I haven't been able see the whole picture of what's happening here.
Try replacing all the 'retail' option buyers with one option buyer with deep pockets, deep enough to buy the same volume. If he can run up the price simply by buying so many options, why isn't a wealthy man like Musk running up his own stock with say, the money in his charity that is said to never have been spent? Why isn't this happening to any stock where someone wants to make some easy money?
Could we use the call volume at a given exp date as a predictor for market tops?
For example, if the mid-march call has lots of opened contracts this means that the day after expiration there will be less leverage and therefore less impulsive price action?
Absolutely - in fact this works for both tops and bottoms. Spotgamma has long argued that put driven market crashes often rebound at opex. And if you look back to the summer of 2021, there was a consistent pattern where the market would fall at monthly opex.
Now though the rise of 0DTE options probably makes this more challenge as options are expiring daily.
I'm not sure if there is a max (maybe someone else knows). more depends on the liquidity of the stock. For more obscure single stocks the bid-ask is huge. For things like Tesla or SPY they have enough volume to keep them tight
The market maker should be getting killed if he waits to hedge based on a formula of how far out of the money the option is when the stock goes up. Add to that, the increasing stock price he causes when he does hedge. Something smells fishy when more people are betting on a horse race than the ones actually going to the window to bet the race.
American Options can be traded and ended at any price. Today's 200 Tesla calls could trade a zillion contracts, never make it to 200 and end the day with zero open contracts. In the meantime money is made and lost. Stock price can go to 400 if he holds the stock and he doesn't lose. If he's holding the stock and the stock goes South, he must sell the stock or lose at some point. Plus, since he has to make a market he has to buy back the option if someone want out. The MM has to make a market. What are the allowable spreads?
Story ends when people stop buying calls, close out existing positions, and stocks fall back to where they were before the squeeze. Whether that happens in days or weeks depends on how persistent and sustained the call buying remains, along of course with other macro or micro variables that could impact sentiment.
Makes a lot of sense, especially with the popularity of 0 dte options.
Yes, the growing popularity of 0DTE is probably worth a whole post to itself! the concept applies, but with even more "fleeting" leverage
I'm afraid I can't remember the source, but some Twitter account I follow was making the case that while we associate retail with the 0DTE options buying, in fact a lot of it is institutional because it doesn't count towards overall on-the-book leverage? My terminology isn't quite correct there, but I think you know what I mean. I cannot verify these claims myself, but would be interesting if it's true.
I believe that was Concoda, who is a good friend and excellent follow on substack and twitter:
https://twitter.com/concodanomics
https://concoda.substack.com/
Yes, it probably was Concoda. That would make sense. Would suggest that institutions stop buying, things could get real dicey real fast.
Outstanding. That was the best description of a gamma squeeze I've read yet. I love your "J" illustration, so simple and concise. Not to be left out, yesterday I bought options for the first time in my life. Some June 30th puts on the SPX @ 3700, I am betting that the party is nearing the 4am closing bell. We shall see.
Cheers for another great article.
Thanks Unhedged!
Sometimes the simplest metaphor is the best... just look at the chart - it's a "j"!
I don't hate the Jun-30 puts either!
+1 on the puts.
By latest May this will print. “Sell in May and go away”....
To preempt the "thanks for reading" response, I would like to say thanks for writing! This is written in such simple English that even a non-finance based professional can understand the concept. Thank you again for the effort you put into your content to keep the quality coming out week after week.
If you can’t explain it like you would to a fifth grader, it’s probably because you don’t have an “elementary” understanding of what you talking about.
I learned how to communicate to 5th graders by reporting to Managing Directors for many years.
Yes, this gamma squeeze did cost me quite a lot of money last week, when i was short $COIN stock. Should have known better !
thanks for this insightful article.
I hardly understood a word of this but thank you for the detailed explanations, its why i dont invest as i have zero idea how i could be fleeced but am intrigued by the stock markets!
The good thing is it’s never been easier to invest in low cost, boring indices which will likely lead to better returns regardless. Thanks for reading!
Great article! I really like your homemade illustrations (and the "J" comparison is very well found btw!)
my illustrations are always homemade, for better or worse! Glad you enjoyed
Well written, good sir
Thanks Nick! Glad you enjoyed
Anybody know how many TSLA $190 calls were still open and in the money at the close? How many$200 calls expired worthless? I'm guessing it was a small % of today's volume in those calls...
No but compare the options traded vs the open interest. I have lots more questions than answers, yet I haven't been able see the whole picture of what's happening here.
Try replacing all the 'retail' option buyers with one option buyer with deep pockets, deep enough to buy the same volume. If he can run up the price simply by buying so many options, why isn't a wealthy man like Musk running up his own stock with say, the money in his charity that is said to never have been spent? Why isn't this happening to any stock where someone wants to make some easy money?
great article
Thanks for reading!
Could we use the call volume at a given exp date as a predictor for market tops?
For example, if the mid-march call has lots of opened contracts this means that the day after expiration there will be less leverage and therefore less impulsive price action?
Absolutely - in fact this works for both tops and bottoms. Spotgamma has long argued that put driven market crashes often rebound at opex. And if you look back to the summer of 2021, there was a consistent pattern where the market would fall at monthly opex.
Now though the rise of 0DTE options probably makes this more challenge as options are expiring daily.
What's the max of a bid-asked spread the market maker is allowed to post?
I'm not sure if there is a max (maybe someone else knows). more depends on the liquidity of the stock. For more obscure single stocks the bid-ask is huge. For things like Tesla or SPY they have enough volume to keep them tight
The market maker should be getting killed if he waits to hedge based on a formula of how far out of the money the option is when the stock goes up. Add to that, the increasing stock price he causes when he does hedge. Something smells fishy when more people are betting on a horse race than the ones actually going to the window to bet the race.
but the OTM call doesn't break even until it hits the strike, so the MM doesn't "lose" until it gets to the money
American Options can be traded and ended at any price. Today's 200 Tesla calls could trade a zillion contracts, never make it to 200 and end the day with zero open contracts. In the meantime money is made and lost. Stock price can go to 400 if he holds the stock and he doesn't lose. If he's holding the stock and the stock goes South, he must sell the stock or lose at some point. Plus, since he has to make a market he has to buy back the option if someone want out. The MM has to make a market. What are the allowable spreads?
Does Tesla end the day with zero open interest?
Great article!
Thanks for reading Andrew!
It would interesting a post about death spiral convertible debt and meme stocks (see last Micheal Burry tweet)
good idea for a future week! I saw the tweet as well.
How does it the story end? What causes it to end?
Story ends when people stop buying calls, close out existing positions, and stocks fall back to where they were before the squeeze. Whether that happens in days or weeks depends on how persistent and sustained the call buying remains, along of course with other macro or micro variables that could impact sentiment.
Awesome article!
Thanks for reading!