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1. I was expecting to read about a gamma squeeze... (people buy far out-of-the-money calls on GME (low delta), option seller is short, buys a bit of GME to get

by FabHK 6y ago

1. I was expecting to read about a gamma squeeze... (people buy far out-of-the-money calls on GME (low delta), option seller is short, buys a bit of GME to get flat, more people buy & price goes up, delta goes up, option seller needs to buy more stock to hedge, and you have your feedback loop going (until option is far in-the-money, delta is one, and option seller doesn't need to buy anymore).) But that never came... it was just positive feedback in perception. 2. It's not "usually" crazier than you expect. Most everywhere, we have feedback loops that keep things stable. Demand rises, prices rise, people think, eh, too expensive, and demand and supply are in balance again. Airplane gets bumped nose-up a bit, angle of attack increases on the wing and the horizontal stabiliser creating upward forces, but everything (centre of gravity, tail volume, etc.) is carefully designed such that this results in a nose-down momentum until the plane is in equilibrium again. And I could go on. That's why it is so unusual when things spin out of control (nuclear bomb, anyone?). 3. As for GME, I trust that the forces of the market will pull it back down where it belongs soon enough. EDIT: closed parenthesis

xapata 6y ago
Using the airplane analogy, there's a good amount of turbulence in the market. Especially as you look at smaller scales, both in time and price changes. There's a decent amount of literature discussing evidence that low-latency trading has increased market turbulence for little efficiency gain. I'm having trouble scrounging up links, but a lot of good research came out of the Santa Fe Institute and associated folks.
- FabHK 6y ago
  Absolutely... I think HFT is useless rent seeking. It provides little efficiency, I think, and the liquidity often drops out when the market needs it most, anyway.
  - throwaway-571 6y ago
    For exemple Robinhood mostly getting out of the GME trading business because it was too hot and they ran out of credit with their clearing house, preventing their users from participating in the market.
sillysaurusx 6y ago
Anyone want to ELI5 gamma squeeze? Isn’t that just a description of what happened with GameStop? But then I thought that was a short squeeze.
- joncrane 6y ago
  Gamma squeeze has to do with options, short squeeze has to do with just stock. Therefore the gamma squeeze has a timing component, while short squeeze can happen at any time irrespective of when options expire.
- FabHK 6y ago
  Let's give it a shot. Squeezing shorts is trying to make sure that the shorts (that need to buy back shares) don't find any shares to buy, thus driving up the price (as they'll offer more and more to buy the shares they're obliged to return to those they borrowed them from). With a gamma squeeze, you also aim to drive up the price, but the mechanism is a different. As you might know, the payoff of a call option (as a function of the stock price S at expiry) looks something like this: __/ With S below the strike K, it's worth nothing, and as S exceeds the strike, the payoff goes up. The price of a call option before expiry looks basically similar, but smoothed out. The delta of an option is the first derivative of that graph, or, to put it differently, the change in the price of the option as S goes up. You can convince yourself that when S is very low, the delta of the option is very close to zero, and as S approaches K, the delta increases, and with S much higher than K, delta is basically 1. (Take an option struck at 50. When S = 10, it's worth basically nothing, and when S = 11, it's still worth basically nothing. So, delta = 0. When S = 200, option is worth about 150, when S = 201, it's worth about 151. So, delta = 1.) [Gamma is the second derivative. It's basically zero when the stock price is very low or very high, as delta doesn't change. But near K, gamma rises - delta changes!] Now, if an option trader sells you a call, you're long (you win if the stock goes up), trader is short. Trader doesn't like that risk, so they'll buy the stock to cancel out their price risk. How much stock? Well, depends on delta. If S is small, and delta, say, 0.1, they only need to buy 0.1 stock. Then, for small movements of S (say, a small increase), what they lose on the option, they gain on the stock. However! If the stock moves substantially, particularly if S approaches K, the delta of the option goes up (gamma is not zero anymore). So, the trader needs to buy more shares to be flat again. So, here's the strategy: Cheaply buy way-out-of-the-money call options (S << K). Then, manage (somehow), to drive the share price S up towards K. The trader who sold you the options will then buy S, potentially driving up S even further. That's the gamma squeeze. [Note: The trader that sold you the call charged you a fixed premium at the beginning. Now they must buy the stock when it has gone up, and sell it when it has gone down. So, as the share price goes up and down, they lose money (since they buy expensive and sell cheap). If the share price goes up and down a lot, they'll lose more than they got on the premium. If the share price goes up and down only a bit, say when it moves smoothly in one direction only, or not at all much, then they'll lose less than they got on the premium, so they'll win. That's why we say that someone that wrote a call is short realised vol: if realised vol is high (higher than the implied one that he charged you for the option), they'll lose, and vv.] When you wrote an option, you're short vol, short gamma, and long theta. When you bought an option, you're long vol, long gamma, short theta.
e79 6y ago
Re #3: I held off investing significant money into Bitcoin because I was convinced that the forces of the market would pull it back down to $10 where it belonged soon enough. I’ve been asking myself ever since why I felt so sure at the time. As for GME, there’s fundamental analysis and financial experts telling us it is only a matter of time before the price free falls. But there’s a serious behavioral dissymmetry here. The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals. I’m not sure you’re wrong, but I’m personally a little bit less certain that the price will drop — at least soon — due to this reason alone. As this article points out, feedback loops can be extremely powerful. And I suspect they can play out over longer periods than we expect.
- cccc4all 6y ago
  The GME situation is huge mess created by billionaire vulture short sellers shorting more than 100% of stocks. Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price. All you have to do is simply buy and hold the stock, and the price will go up. Traditional buy/sell signals are irrelevant, because of the short seller shenanigans. The short sellers created this perfect trap for themselves, now they are scrambling to get out of using every dirty tricks. The more WSB crowd is aware of this scenario, the more they jump in to the diamond hands philosophy.
  - FabHK 6y ago
    > Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price. Yeah, but as I've explained elsewhere: Suppose long interest is 240% and short interest 140% (leaving net supply of 100% shares). Then, even if redditor HODLers hold 99% of actual shares, and won't sell them, it's enough if there is 1% free float, and the 141% remaining longs (who have lent out their shares to the shorts) are happy to sell at the current inflated price. The shorts can then close out their position with 140 of those 141 longs, and then you're left with 99% shares held by redditors, and 1% held by someone else who might want to sell at this point. To squeeze the shorts, you need to control 100% or more of the long interest. I doubt that's the case here.
cccc4all 6y ago
Time in the market is more important than timing the market, is a common investment advice. Current GME situation is not investing, it's short term speculation and gambling and ideological tussle and class fragmentation thrown in. All investing strategies and tactics are thrown out the window. The billionaire vulture short sellers got careless and lazy by shorting 140% of stock. Then, they got caught with their pants down with naked shorts and now squealing to everyone to bail them out. They could have just ate the losses, but they decided to pull all the dirty tricks and shenanigans. It may or may not work. The WSB crowd battling the billionaire vulture short sellers are out for more than gains.
- gruez 6y ago
  >but they decided to pull all the dirty tricks and shenanigans like what? >The WSB crowd battling the billionaire vulture short sellers are out for more than gains. I'm personally skeptical of this. It's easy to say you're doing this with noble reasons on the way up, but it's hard to tell whether the people are serious, or they they're trying to ensure there's enough bagholders to sell into.
  - cccc4all 6y ago
    The Robinhood shenanigans that stopped people from buying GME and allowed selling GME. Melvin Capital claiming they got out of short positions, without any significant changes in short %. The entire financial media propaganda telling people to sell GME. etc. I didn't say WSB crowd was acting with noble reasons, but they are acting with more than financial interests. If you've read recent WSB posts, lot of the emotional appeal is ideological and class fragmentation, than lolz gainz. And, very few people actually posts in forums, so you have to multiply the sentiment by thousands, if not millions. The bottom line is the price of GME, it's still above $300. Which everyone knows and agrees is over valued. Why, especially after the turbulent week?
    - throwaway-571 6y ago
      I am wondering the same. Maybe everybody is kinda hoping for the short squeeze? WSB is to stick it to the man but the other market participants? The stock is shorted above 100%. If the price goes up enough, maybe the shorters will be have to exit their position and then will be the one left bagholding? It really depends at which price they started the short. $8, $20 $350 $450? But the puzzle is that "retail" is only a third of the market. a lot of the after hour kept it above 300 on Thursday and on Friday, and that is not the John Q Public doing those trades, so the big fish seem to be in agreement that it might be worth a try to go for the squeeze?
paulpauper 6y ago
It would seem almost all the GME buying is in the afterhours and premarket, causing these huge 100% gaps. This suggests an effort to squeeze call sellers, as options cannot be traded afterhours and rpemarket. This means call sellers need to buy stock to neutralize the delta.
ineedasername 6y ago
EDIT: closed parenthesis Well, it still failed to compile because you didn't have a trailing ";" and the rest of your comment wasn't even in programming code.

by FabHK 6y ago

xapata 6y ago

Using the airplane analogy, there's a good amount of turbulence in the market. Especially as you look at smaller scales, both in time and price changes. There's a decent amount of literature discussing evidence that low-latency trading has increased market turbulence for little efficiency gain. I'm having trouble scrounging up links, but a lot of good research came out of the Santa Fe Institute and associated folks.

FabHK 6y ago
Absolutely... I think HFT is useless rent seeking. It provides little efficiency, I think, and the liquidity often drops out when the market needs it most, anyway.
- throwaway-571 6y ago
  For exemple Robinhood mostly getting out of the GME trading business because it was too hot and they ran out of credit with their clearing house, preventing their users from participating in the market.

sillysaurusx 6y ago

Anyone want to ELI5 gamma squeeze? Isn’t that just a description of what happened with GameStop? But then I thought that was a short squeeze.

joncrane 6y ago
Gamma squeeze has to do with options, short squeeze has to do with just stock. Therefore the gamma squeeze has a timing component, while short squeeze can happen at any time irrespective of when options expire.
FabHK 6y ago
Let's give it a shot. Squeezing shorts is trying to make sure that the shorts (that need to buy back shares) don't find any shares to buy, thus driving up the price (as they'll offer more and more to buy the shares they're obliged to return to those they borrowed them from). With a gamma squeeze, you also aim to drive up the price, but the mechanism is a different. As you might know, the payoff of a call option (as a function of the stock price S at expiry) looks something like this: __/ With S below the strike K, it's worth nothing, and as S exceeds the strike, the payoff goes up. The price of a call option before expiry looks basically similar, but smoothed out. The delta of an option is the first derivative of that graph, or, to put it differently, the change in the price of the option as S goes up. You can convince yourself that when S is very low, the delta of the option is very close to zero, and as S approaches K, the delta increases, and with S much higher than K, delta is basically 1. (Take an option struck at 50. When S = 10, it's worth basically nothing, and when S = 11, it's still worth basically nothing. So, delta = 0. When S = 200, option is worth about 150, when S = 201, it's worth about 151. So, delta = 1.) [Gamma is the second derivative. It's basically zero when the stock price is very low or very high, as delta doesn't change. But near K, gamma rises - delta changes!] Now, if an option trader sells you a call, you're long (you win if the stock goes up), trader is short. Trader doesn't like that risk, so they'll buy the stock to cancel out their price risk. How much stock? Well, depends on delta. If S is small, and delta, say, 0.1, they only need to buy 0.1 stock. Then, for small movements of S (say, a small increase), what they lose on the option, they gain on the stock. However! If the stock moves substantially, particularly if S approaches K, the delta of the option goes up (gamma is not zero anymore). So, the trader needs to buy more shares to be flat again. So, here's the strategy: Cheaply buy way-out-of-the-money call options (S << K). Then, manage (somehow), to drive the share price S up towards K. The trader who sold you the options will then buy S, potentially driving up S even further. That's the gamma squeeze. [Note: The trader that sold you the call charged you a fixed premium at the beginning. Now they must buy the stock when it has gone up, and sell it when it has gone down. So, as the share price goes up and down, they lose money (since they buy expensive and sell cheap). If the share price goes up and down a lot, they'll lose more than they got on the premium. If the share price goes up and down only a bit, say when it moves smoothly in one direction only, or not at all much, then they'll lose less than they got on the premium, so they'll win. That's why we say that someone that wrote a call is short realised vol: if realised vol is high (higher than the implied one that he charged you for the option), they'll lose, and vv.] When you wrote an option, you're short vol, short gamma, and long theta. When you bought an option, you're long vol, long gamma, short theta.

e79 6y ago

Re #3: I held off investing significant money into Bitcoin because I was convinced that the forces of the market would pull it back down to $10 where it belonged soon enough. I’ve been asking myself ever since why I felt so sure at the time. As for GME, there’s fundamental analysis and financial experts telling us it is only a matter of time before the price free falls. But there’s a serious behavioral dissymmetry here. The market is rich with GME stock buyers who don’t care to listen to any of these traditional buy/sell signals. I’m not sure you’re wrong, but I’m personally a little bit less certain that the price will drop — at least soon — due to this reason alone. As this article points out, feedback loops can be extremely powerful. And I suspect they can play out over longer periods than we expect.

cccc4all 6y ago
The GME situation is huge mess created by billionaire vulture short sellers shorting more than 100% of stocks. Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price. All you have to do is simply buy and hold the stock, and the price will go up. Traditional buy/sell signals are irrelevant, because of the short seller shenanigans. The short sellers created this perfect trap for themselves, now they are scrambling to get out of using every dirty tricks. The more WSB crowd is aware of this scenario, the more they jump in to the diamond hands philosophy.
- FabHK 6y ago
  > Thereby, when you buy current GME stock, the stock also has an attached buyer that has to buy that stock back, at ANY price. Yeah, but as I've explained elsewhere: Suppose long interest is 240% and short interest 140% (leaving net supply of 100% shares). Then, even if redditor HODLers hold 99% of actual shares, and won't sell them, it's enough if there is 1% free float, and the 141% remaining longs (who have lent out their shares to the shorts) are happy to sell at the current inflated price. The shorts can then close out their position with 140 of those 141 longs, and then you're left with 99% shares held by redditors, and 1% held by someone else who might want to sell at this point. To squeeze the shorts, you need to control 100% or more of the long interest. I doubt that's the case here.

cccc4all 6y ago

Time in the market is more important than timing the market, is a common investment advice. Current GME situation is not investing, it's short term speculation and gambling and ideological tussle and class fragmentation thrown in. All investing strategies and tactics are thrown out the window. The billionaire vulture short sellers got careless and lazy by shorting 140% of stock. Then, they got caught with their pants down with naked shorts and now squealing to everyone to bail them out. They could have just ate the losses, but they decided to pull all the dirty tricks and shenanigans. It may or may not work. The WSB crowd battling the billionaire vulture short sellers are out for more than gains.

gruez 6y ago
>but they decided to pull all the dirty tricks and shenanigans like what? >The WSB crowd battling the billionaire vulture short sellers are out for more than gains. I'm personally skeptical of this. It's easy to say you're doing this with noble reasons on the way up, but it's hard to tell whether the people are serious, or they they're trying to ensure there's enough bagholders to sell into.
- cccc4all 6y ago
  The Robinhood shenanigans that stopped people from buying GME and allowed selling GME. Melvin Capital claiming they got out of short positions, without any significant changes in short %. The entire financial media propaganda telling people to sell GME. etc. I didn't say WSB crowd was acting with noble reasons, but they are acting with more than financial interests. If you've read recent WSB posts, lot of the emotional appeal is ideological and class fragmentation, than lolz gainz. And, very few people actually posts in forums, so you have to multiply the sentiment by thousands, if not millions. The bottom line is the price of GME, it's still above $300. Which everyone knows and agrees is over valued. Why, especially after the turbulent week?
  - throwaway-571 6y ago
    I am wondering the same. Maybe everybody is kinda hoping for the short squeeze? WSB is to stick it to the man but the other market participants? The stock is shorted above 100%. If the price goes up enough, maybe the shorters will be have to exit their position and then will be the one left bagholding? It really depends at which price they started the short. $8, $20 $350 $450? But the puzzle is that "retail" is only a third of the market. a lot of the after hour kept it above 300 on Thursday and on Friday, and that is not the John Q Public doing those trades, so the big fish seem to be in agreement that it might be worth a try to go for the squeeze?

paulpauper 6y ago

It would seem almost all the GME buying is in the afterhours and premarket, causing these huge 100% gaps. This suggests an effort to squeeze call sellers, as options cannot be traded afterhours and rpemarket. This means call sellers need to buy stock to neutralize the delta.

ineedasername 6y ago

EDIT: closed parenthesis Well, it still failed to compile because you didn't have a trailing ";" and the rest of your comment wasn't even in programming code.