GME Plays Frenzied Gamma Squeeze Game Of Chicken

GME is up 56% today, traded as high as 80%, and was halted multiple times. With a move like that, you would assume that the company had some major announcement that fundamentally alters the company’s future profitability. In the case of GME, you would be wrong.

Apparently, a Reddit community post can direct the hordes of uninformed traders to pile on a company hoping to not be the greater fool. The issue with type of bullish hysteria is that it always ends badly. The only question is how long a greater fool is available to take the shares at an incrementally higher price.

If this sounds like a Ponzi scheme, you wouldn’t be wrong with that sort of assertion. However, let's dig deeper into the internal drivers of the momentum and the fundamental outlook for the company.

What is a Gamma Squeeze?

In order to begin to understand the movement in GME, you need to understand the concept of a “gamma squeeze.” This is a type bullish feedback loop that can generate big movement in a company in a short period of time.

Gamma refers to the second derivative of the option’s delta. Delta is how much the option price will change for a $1 move. As a result, gamma is what the delta will be on the second $1 move. For someone that is short calls in a stock, the incremental risk increases as the share price of the underlying rises.

The gamma squeeze begins as a flurry of call option buyers come in a buy a significant amount of option contracts at market. This will place the option maker in a difficult position as being short a bunch of just OTM calls puts them at risk. That risk is offset through buying shares of the underlying. The resulting move attracts more bullish interest and so on.

GME Gamma Squeeze

GameStop was a prime candidate for this type of feedback loop. The first reason is because the company had a significant amount of short interest. According to Yahoo Finance, as of December 31, 2020, 71.2 million shares were shorted with a float of 47.01 million and shares outstanding of 69.75 million. If the data is correct, that means over 100% of the outstanding shares were short before the squeeze.

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William K. 1 month ago Member's comment

Another description would be "stampede", where the herd stsrts running because the herd started running. No actual logic involved anywhere, just running because the others are It is important to be wiser than the main courseof a steak dinner.running. Not the best way to make choices.