Leverage-whether it’s through trading on margin or the buying of out-of-the-money call options-is a double-edged sword. That last point may be of particular importance, as it can lead to a gamma squeeze (more on that in a bit). Deep pockets lined up on both sides of the trade, often using options and other leveraged instruments.A case for massive growth as well as a case for financial stress.A dynamic narrative, one that serves to “justify” the detachment of share prices from a company’s intrinsic value.Why would something like this happen to TSLA, GME, or any other stock? There are a bunch of possible reasons, but a short squeeze is one of the main ones.Ĭlassic signs of a short squeeze can include: By January 27 it was worth $24 billion, roughly the same as the meat giant Tyson Foods (TSN) and the fuel refiner Valero Energy (VLO). As noted by the New York Times, GME-a denizen of malls and shopping centers across the country-was worth about $2 billion in December. In the case of GME, a surge in trading drove its value up by more than $10 billion on a single day. Those with a short position (meaning they won’t profit unless shares fall) can find themselves either holding on for dear life or forced to jump ship before potential losses pile up too high. When this happens-as it did in a very big way with GME early in 2021-the consequences can be brutal for anyone on the wrong side of the trade. Now even your average college student has become familiar with the meaning-and may have actually participated in one (gulp!). All these stocks and several more felt the impact of what’s now very well-known terminology: the short squeeze and its options-related cousin, the so-called gamma squeeze.Ī year ago, few people except market veterans would have known a short squeeze from a long jump. So far this year, it’s been AMC Entertainment (AMC), GameStop (GME), and American Airlines (AAL).Īnyone watching the markets and reading the news in January 2021 likely already knows what we’re talking about. A squeeze can potentially be worth trading, but only with great care.When a squeeze involves options contracts, it’s sometimes called a “gamma squeeze” A stock that rallies hyperbolically when there’s no news could be going through a “short squeeze”.
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