The Wrap: Gamma Squeeze - Stake Global

The Wrap: Gamma Squeeze

Understanding rallies through a gamma squeeze, life after sports and a new no. 1 stock on Stake.

5 hottest stocks on Stake

    • Nio (NIO) – for the first time in what feels like a year, Nio is the new #1 over Tesla
    • Palantir (PLTR)
    • Teledoc (TDOC)
    • Beyond Meat (BYND)
    • BioNTech (BNTX)

*Stocks rising quickly on our Top 50 Most Traded list

Gamma Squeeze

Last week we became familiar with the fairly straightforward concept of the short squeeze. Let’s take it a step further and try to understand the effect of derivatives on stock prices. While stocks largely determine the price of derivatives like options, sometimes the relationship works both ways.

In an effort to understand the seemingly irrational rallies that some stocks endure, I present the ‘Gamma Squeeze’.

A market maker provides liquidity to markets by taking the other side of derivative trades. In fact, they are usually obligated to by exchanges. Calls, a form of option, go up in value when the price of the underlying stock rises. When speculators begin to buy calls on a stock, market makers will buy the underlying stock to hedge their exposure. Should the calls find themselves ‘in the money’, the market maker will be able to offset their losses.

Just like a short squeeze, as the stock price starts to rise and speculators increase their call positions, MMs are forced to buy the underlying forcing the price up further in a quasi-positive feedback loop. A reminder, stock rallies are powered by more than just bullish investors.

Seed

Life after sport for many athletes is a daunting place; there are only so many motivational speaking gigs and private coaching lessons a former star can do in a year. To try to match the thrills, excitement (and money) one can only find in the arena, many athletes are turning to the markets.

We have spoken in the past about a former MVP and now the biggest investor in history.
At 7ft1, 147kgs Shaquille O’Neal might not yet be a billionaire but there won’t be any larger than him. From a 1999 stake in Google to nightclubs and fast-food chains. He has revealed the simple philosophy guiding his decisions, a piece of advice passed on from Jeff Bezos; invest in what “can change people’s lives”.

Former Aussie Cricket Captain Steve Smith has already earned more through his investments than his whole cricketing career…IPL contracts included. AU$100k invested in mattress startup Koala in 2015 is now worth AU$13.7m.

And of course the Winklevoss twins. Made famous in the Social Network, the Harvard educated Olympic Rowers are rumoured to own more than 1% of all Bitcoins.

Serena Williams founded the aptly named Serena Ventures. As one of America’s richest self-made women, her fund gives a diverse range of founders access to the capital they need to change the world.

While we’re on the topic, and without becoming a celebrity gossip magazine, sports icons aren’t the only ones finding success in a second career. Ashton Kutcher co-founded Sound Ventures– the fund became early investors in names like Uber and Spotify.

I think this comes down to one simple lesson: work/network hard enough to be able to get in at the Seed stage of investment!

Top 5 Gainers

  • FuelCell Energy (FCEL) +70.9%
  • Fossil Group (FOSL) +69.5% 
  • GrowGeneration (GRWG) +43.4%
  • Jumia (JMIA) +32.7%
  • MoneyGram (MGI) +29.0%

Top 5 Fallers

  • Palomar Holdings (PLMR) -28.3%
  • BioNTech (BNTX) -23.0%
  • Air Products and Chemicals (APD) -14.4%
  • Root (ROOT) -11.1%
  • IQIYI (IQ) -10.5%

Trade Teaser

Stocks influence the price of options but options also influence the price of stocks. The number of wolves in a forest influence the number of rabbits but the number of rabbits affects the number of wolves.

X determines Y but Y determines X

In statistical/mathematical parlance, what is the name for such a relationship?

What We’re Following | @Tiaan_Stals

Known in social circles as ‘The young Elon Musk’, here’s your chance to follow the next great generational thinker. I’m not just using this space to plug a mate. Read his work on why growth is an overrated yet central part of economic policy or his case for nuclear power and I guarantee you will smash that follow button.

A former Stake intern cum software engineering genius, Tiaan, has moved on to further study in Economics and Computer Science. Amongst his own articles are plenty of great retweets and comments on all things from MMT to monopoly power.

Best Buy | MRNA

Buying into the possibility of a vaccine, this trader has held on since April. With the Moderna vaccine success story pushing the stock back to highs, they are up 3x.

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