U.S. markets closed
  • S&P 500

    3,811.15
    -18.19 (-0.48%)
     
  • Dow 30

    30,932.37
    -469.64 (-1.50%)
     
  • Nasdaq

    13,192.35
    +72.92 (+0.56%)
     
  • Russell 2000

    2,201.05
    +0.88 (+0.04%)
     
  • Crude Oil

    61.66
    -1.87 (-2.94%)
     
  • Gold

    1,733.00
    -42.40 (-2.39%)
     
  • Silver

    26.70
    -0.98 (-3.56%)
     
  • EUR/USD

    1.2088
    -0.0099 (-0.81%)
     
  • 10-Yr Bond

    1.4600
    -0.0580 (-3.82%)
     
  • GBP/USD

    1.3922
    -0.0091 (-0.65%)
     
  • USD/JPY

    106.5500
    +0.3200 (+0.30%)
     
  • BTC-USD

    46,334.98
    -1,173.35 (-2.47%)
     
  • CMC Crypto 200

    912.88
    -20.25 (-2.17%)
     
  • FTSE 100

    6,483.43
    -168.53 (-2.53%)
     
  • Nikkei 225

    28,966.01
    -1,202.26 (-3.99%)
     

Short-Squeeze Frenzy and Option Gamma Gearing

  • Oops!
    Something went wrong.
    Please try again later.
Kevin Cook
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.

The short-squeeze frenzy continued today with GameStop GME up over $200, or 150%, at one point this morning.

Just last night, my 20-something son who's in the Marines at Camp Pendleton, and a Reddit user, texted me "This GameStop situation is pretty crazy."

I replied "Yeah too many picking up day trading with lots of free time and easy money from the Fed. Many will get rich temporarily, but lots will also get hurt buying the highs."

The Robinhood leaders of Reddit message boards like r/wallstbets are leading their merry pranksters to fortunes in stocks with high short-interest. Describing themselves as "Degenerates" -- as if "4chan found a Bloomberg Terminal" -- they number 3.1 million on the site.

Besides the big short-interest positions in stocks by hedge funds that are being forced to cover (buy the stock back), there is a unique role that call options can play in this tale of Wall Street's Davids vs. the Goliaths.

To help break it all down, I invited my colleague Dave Borun into Cook's Kitchen today. Dave was a professional options market maker for over 15 years and member of several exchanges including CME and CBOE. He was manager of a 25-person proprietary trading group from 2006 to 2011.

In the video that accompanies this article, Dave explains much of the options dynamics that can help throw gasoline on a short-squeeze bonfire.

To get you started, I highly recommend the article he published yesterday...

How Options Trading is Fueling the GameStop Rally

Dave and I dive into several nuances of these big moves and observe how it could last for several more weeks as new "targets" of professional squeezers, and their followers, are uncovered.

Today's rockets and short-covering crime scenes include AMC Entertainment AMC, up over 250%, apparel retailer Express EXPR, up over 350%+ at one point and settling down for +200% now, and headphone maker Koss KOSS still surging an astonishing 400%+ at I type at 2pm ET on Wednesday.

You could almost think of the short-squeeze pros, who know how to day trade, as now having an army of Orcs to aid their attacks. They post data about stocks with high short-interest and then rally the troops on the message boards like StockTwits, with dollar signs -- and vengeance against Wall Street Goliaths -- in their eyes.

And cheerleading from the sidelines is a new anti-hero of investing, Chamath Palihapitiya, an early senior executive at Facebook (and now FB critic) who created one of the first big successes with a SPAC (special purpose acquisition company) that helped Richard Branson's Virgin Galactic SPCE go public in late 2019.

Another rocket of late has been BlackBerry BB. My colleague Jeremy Mullin, who runs the Counterstrike trading service at Zacks, bought BB on January 8th as a technical and fundamental play using his own data and analysis. Today he cashed in part of the position for a 250% gain never expecting to benefit this much from the current frenzy that began a week later.

Now if we can just get some of the ponies in my stable on the squeeze train! (I kid).

For more details on the options dynamics helping fuel these massive momentum moves, be sure to check out my lengthy interview with Dave Borun.

Kevin Cook is a Senior Stock Strategist with Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 best buy-and-hold tickers for the entirety of 2021?

Last year's 2020 Zacks Top 10 Stocks portfolio returned gains as high as +386.8%. Now a brand-new portfolio has been handpicked from over 4,000 companies covered by the Zacks Rank. Don’t miss your chance to get in on these long-term buys.

Access Zacks Top 10 Stocks for 2021 today >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
GameStop Corp. (GME) : Free Stock Analysis Report
 
Express, Inc. (EXPR) : Free Stock Analysis Report
 
AMC Entertainment Holdings, Inc. (AMC) : Free Stock Analysis Report
 
BlackBerry Limited (BB) : Free Stock Analysis Report
 
Virgin Galactic Holdings, Inc. (SPCE) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research