“Put buying en masse would add to dealers’ short put positioning and could create much more severe structural leverage imbalance to the downside,” said Cem Karsan, founder of Aegea Capital Management LLC and a former options market maker.
Karsan, who has 24,000 Twitter followers, floated the scenario on The Derivative podcast last week.
Once an obscure dynamic in the market plumbing, gamma squeezes are the talk of both Wall Street and the amateur crowd following the GameStop drama.
It goes like this. When an investor buys a call, the dealer who sold the contract will typically hedge by purchasing the underlying stock. The more the latter rises toward the option’s strike price, the more shares the market maker will theoretically have to buy. That can supercharge stock prices as shares rise and dealers buy more.
And the dynamic works in reverse, too.
Dealers who have sold puts will hedge themselves by selling the underlying shares. As the price drops toward the option’s strike, they will sell more and more.
Mobs are emotional, extremely aggressive, thrive on contradiction but they are also fickle. They can look like the strongest army in the world until they lose cohesion. Then they fall apart and turn into the weakest. Mobs thrive as long as they are growing and the reason for that growth is still compelling. As soon as it ends, they dissolve quickly. As GameStop’s mob dissolves it might be some time for a crowd to coalesce around a new idea. There are plenty of candidates from biotech to silver to micro-caps and cryptocurrencies.Click HERE to subscribe to Fuller Treacy Money Back to top