Short Squeezing and Gamma Squeezing

Unless you have been living under a rock for the past two weeks, you have most definitely heard about the short squeeze “phenomenon” in specific tickers, such as GME (GameStop), AMC, NOK (Nokia), KOSS (Koss Corp) ERIC (Ericcson), FUBO (FuboTv), etc. The amount of media attention given to these tickers, along with the Reddit page “Wallstbets” is unprecedented, with an enormous amount of new, retail traders, trying to jump in on, what seems to be, the answer to all of their financial prayers. Robinhood, despite its restrictions placed on the tickers listed above, added over 1 million accounts during the GameStop run. However, that being said, a large portion of the influx of new, retail traders do not fully understand what a short squeeze is. Additionally, they also have not heard of Gamma squeezing with options, and what the potential consequences could be for their newfound margin accounts.

As a seasoned trader, conventional wisdom tells us to ‘follow the trend’, but is it worth it in this case? This all sounds very reminiscent of the shoeshine boy giving John F. Kennedy Sr. stock advice before the Great Depression, but is that analogy even applicable with the emergence of online trading groups and the infamous WallStBets?

What is Short Squeezing?

Short Squeezing happens when a ticker, with large short interest, moves considerably higher, with velocity, and therefore forces short-sellers (those who have made a bet against the stock, predicting that the price will fall) to cover their short positions by buying shares at the new high price, pushing the share price higher with incredible force. For traders who are bullish, short squeezing presents a great opportunity to jump in on the trend and ride the bullish price action. Short squeezes tend to sell off after a significant move,  and retail traders should either take profit, which could be significant or move their stop losses up in sync with the stock,

What is Gamma Squeezing?

A Gamma squeeze happens when out-the-money calls start being purchased rapidly, as options sellers (aka, market makers) and big money short-sellers, start hedging against either the call contracts market makers sold, or an imminent short squeeze. This buying pressure especially can cause a vacuum effect, with more and more traders buying out-the-money calls, or buying the stock, increasing buying pressure and forcing a squeeze. When market makers sell contracts, they often Delta hedge their positions. The higher the Delta is for the contract they sell, the more shares they must either buy to hedge their short contract positions.  Large amounts of share buying to Delta Hedge (buying is common when a market maker is selling calls, as that is a short position, and buying shares offsets their negative Delta) is the main driver behind a Gamma Squeeze. Delta is the rate of change in an option contract’s value for every $1 move in the underlying security, and Gamma, which measures the rate of change in an option contract’s Delta, rapidly increases in value by compounding, therefore increasing the value of the option contract’s Delta.

How Do They Work In Tandem?

Gamma squeezes and short squeezes often happen at the same time. This is because the market maker or institution is taking a short position in both scenarios, and therefore, has to properly hedge their short position by going long at the same time. When they both happen simultaneously, the squeeze is aggressive, which is what we saw in the most recent  GME squeeze.

 How To Capitalize on Short Squeezes and Gamma Squeezes

There are a few ways to capitalize on short squeezes and Gamma squeezes. By using order flow, we can observe out-the-money calls being purchased. Also, by reading the tape, we can see large amounts of shares being bought. By catching these orders quickly, we can go long before the squeeze. If you’re an options trader like myself, getting in before the squeeze is, most of the time, imperative, as you’d like to get in before the explosion in implied volatility.

Practicing risk management is of the utmost importance when trading short squeezes and Gamma squeezes, as they tend to experience halts, and then sell off quickly. Using stop losses, and moving your stop loss up with the underlying, is extremely important, as it helps you avoid large losses when the squeeze starts to reverse (and they often reverse quite aggressively).

Retail Frenzy

Wall St. Bets – GME (GameStop) Explained

‘WallStBets’, a Reddit page popular amongst retail investors, used to converse about popular stocks, share due diligence, share their positions, or even just post memes, always has a list of trending stock names, and GME has been trending for a while. A few members of WallStBets realized that GME had an enormous short float of 140% (on average, any short float percentage over 20% is considered a large short float). 140% was larger than the total shares outstanding. This is because when it comes to short selling,  the same share can be sold more than once, that is, if the buyer of the short-sold share lends that specific share out to another buyer for shorting. WallStBets members discovered this, and a campaign was started to force a short squeeze in GME, with the intention of forcing hedge funds with the largest short positions (Melvin Capital, in particular) to buy the shares they sold short back for an exuberant amount per share. After Elon Musks “Gamestonk” tweet, and Chamath Palihapitiya’s revealed long position in GME, both on January 26th, GME rallied after hours a whopping 134% ($200) after hours. On January 27th, GME hit an intraday high of $483 per share before starting to sell-off. Shortly after this short squeeze was forced, Melvin Capital incurred a 53% loss for the month of January, and was forced to, allegedly, close out their short position in GME after it surged 1600%. Citadel and Point72, two other prominent hedge funds, bailed out Melvin Capital by lending almost $3 billion to the now struggling hedge fund. WallStBets celebrated Melvin Capital’s loss, and the effort to continue to short squeeze GME has since turned into an effort to put the big guys (mainly hedge funds who short-sell) out of business, mainly due to their years of market manipulation against retail.

GME Tweet

Elon Musk Gamestock

A well-known member in the WallStreetBets community, who goes by the username “DeepF–kingValue” (real name is Keith Gill) took a long position in GME in 2019 and was providing daily updates on his long position, comprised of both shares and call options, which also fueled the GME rally in the WallStreetBets community.

A Coordinated Effort

While simultaneously discovering their newfound power in numbers, members of WallStBets started promoting short squeezes in other heavily shorted tickers, such as AMC, BBBY (Bed Bath & Beyond), NOK (Nokia), etc, and soon after, these names started to squeeze as well. WallStBets’s user numbers increased by a whopping 5.6 million, between January 24th and February 5th, as new retail traders flocked to the Reddit platform to get a piece of the next big squeeze. SLV (iShares Silver Trust), an ETF that tracks the price performance of the underlying holdings in the London Silver Fix Price, appeared to be the next target, which resulted in a 13% gap up in the overnight session in SI00 futures, and SLV ETF opened 6% higher in the morning session Monday, February 1st. However, the SLV pump has been refuted by most WallStBets users, saying this was a coordinated effort by big money to take the attention off of GME and divide the newfound power found in retail.


What Goes Up, Must Come Down?

Soon after the squeeze in GME, AMC, and the other names listed above, certain brokers, namely, Robinhood, Interactive Brokers, and TD Ameritrade, placed trading restrictions on GME, AMC, NOK, BB, EXPR, and KOSS, allowing their users to only liquidate their positions, and not create new ones. These restrictions, inevitably, led to mass selling and profit-taking, bringing these names ALMOST back down to earth. Additionally, many users on WallStBets have accused big money of “short ladder attacks”. Short ladder attacks are manipulated buying and selling of a ticker on low volume (notably, during after-hours trading) with counterfeit shares. The intention is to bring the price of the ticker down. As this process is repeated, it causes the ticker to enter into a downward spiral, and shorts can then begin to flood the market with lower and lower bid orders (however, it is important to note that the existence of “short ladder attacks” have been disputed, and this theory was apparently invented in a WallStBets post).


Consequently, after these restrictions were placed, GME has lost 82% of it’s value, after hitting a high of $480 on Wednesday, January 27th, and closing at $63.77 on Friday, February 5th. AMC has followed a similar trajectory, hitting a high of $19.90 per share on Wednesday, January 27th, and closing at $6.83 on Friday, February 5th, losing 66% of its value. On Friday, February 5th, the last of Robinhood’s trading restrictions on GME, AMC, NOK were lifted, which caused a small rally at open, but after 3 consecutive halts in GME, it traded sideways for the remainder of the day.

What Happens Next?

Potential Regulation

Since the GME squeeze, new trading regulations have been discussed amongst the SEC (Securities and Exchange Commission), and even talk of unwinding GME trades has been circulated (although, this is very unlikely). The SEC is also investigating potential fraud on WallStBets, and other social media platforms, for adding fuel to the fire and instigating a short squeeze in GME, AMC, and other heavily shorted stocks. DeepF–kingValue aka Keith Gill, the GME call/long stockholder, is said to be under investigation as regulators take a look at his previous financial advisor job, as his investment may have broken rules associated with his job as a financial advisor. Keith Gill is also expected to testify to the House Financial Services Committee on February 18th, 2021, along with Robinhood Co-Founder and CEO Vladimir Tenev.

Was Retail Really Behind this Short Squeeze?

Yes and no. Of course, if millions of people band together to buy shares of a stock with a short float of 140%, exceeding the shares outstanding, it can definitely cause a pump in the stock, however, there is no doubt in my mind that big money played their part in promoting frantic buying in GME. The consistent notable long flow was detected in GME:

Bulish GME Stock

Very bullish GME order executed before close on January 26, 2021.

There is no way big money is buying ITM calls (different from the Gamma Squeezing hedging position of OTM calls, bought to hedge against an imminent short squeeze) for 130.00 per contract unless they knew those positions would be profitable and exceed the IV and premium paid for the contract. Additionally, after-hours share activity, or share orders executed at the close, are very telling of what a stock will do the next day as they are less likely connected to options (aka, they’re likely not a Delta hedge). On January 26th,  a large share order was also executed at the close:

SUSQ Above ASK146k of GME shares were bought at the ask at the close of January 26, 2021, for $147.98 per share.

It’s obvious that this order was clearly not executed by retail, but by a large institution that was going “along for the ride.”

 Long-Lasting Impact

Besides potential regulation resulting from the GME short squeeze, a lasting impact from this phenomenon is likely. Hedge funds, going forward, will likely not enter into unhedged, heavy short-positions, and retail will forever remember the power they supposedly wielded when they banded together to manipulate a stock with a large short float interest, forcing hedge funds to cover. Many retail millionaires emerged from this epic short squeeze, however, due to the promoted belief of not ever selling their GME long positions, despite the losses they’ve incurred, many have also lost much of what they gained, and are still holding until this day. Despite the influx of new retail traders and the shoeshine boy indicator at an all-time high, we have never seen a coordinated effort amongst retail traders on a social media platform, especially of this magnitude. Before the internet, many small, in-person stock groups existed to discuss potential investment opportunities in stocks, but we have never seen an unprecedented effort by presumably millions of retailer traders,  banding together and manipulating the market successfully, something that was once only reserved for the whales of Wall Street. Our online stock groups revolutionizing the market as we know it? Can these social media investing groups revolutionize the market the way Facebook has revolutionized social interaction, or how Amazon has revolutionized e-commerce? Time will only tell. At the time of this article, GME currently has a short float of anywhere between 123% and 177% (according to certain posts on WallStBets), and going long on GME is still being heavily promoted on WallStBets. Regardless of it being 123% or 177%, the short float is still huge, and another GME squeeze is definitely still possible.

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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.