Who was in control of the game? Who was buying? Where is this volume coming from? With the prices rising, the transaction momentum was clearly driven from the buy-side. The short interest going into the February surge was thus much lower, and did not change much during the event. The straightforward interpretation is that short sellers were squeezed and most were forced to cover. Prior to the January surge, the short interest in GME was very large - over 100% of the public “float.” įollowing the January surge, t he short interest had been reduced by almost 80%. The data on the short interest is available only biweekly. If there is a difference between these two events, a close examination of the two peaks may shed light on these matters. They questioned my conclusion that short squeezing played a much smaller part in the February event. They questioned whether the short interest really was reduced substantially (as officially reported) between the first and the second surge. But if the February surge was effected without the extra “fuel” of a large short interest, using the gamma mechanism alone, it may mean that this phenomenon could spread to many other companies, regardless of the short position. The Reddit “apes” (yes, that is what they call themselves) have focused their attention until now on stocks with a significant short interest, which was clearly the case for GME prior to the January surge. If high demand for low-cost options can drive a corresponding demand for high-cost shares (for hedging by the option-sellers), this new tactic may have a much wider applicability, and could become a more common occurrence. Social media can quickly enlist large numbers of retail players. Options are much cheaper than the underlying shares. A “gamma squeeze” is much easier to mobilize. Short squeezes are well-understood, but are hard to engineer (for reasons discussed in my previous column). If this view is correct, it has broader significance. This implies that in February the “gamma squeeze” alone was able to drive up the price. But there are no short sellers of size in the market who didn’t prepare for such a move.” GME has rallied again, gaining more than 400% from a Feb. The coordinated effort led (largely) by traders on Reddit was brilliant. It nearly bankrupted one hedge fund, Melvin Capital, and caused huge losses at many others.
“The original trade that sent GME stock soaring back in January looks like a well-executed short squeeze.Other observers came to the same conclusion.
In the January surge, this gamma hedging action helped squeeze unwary short sellers, who were caught out and forced to cover, adding to the “melt-up.” In the February surge, it appears that the short interest played a much smaller role. Previous columns made the case that this event arose from a novel process called a “gamma squeeze.” A rise in demand for GME call options led the option-sellers to hedge their risk by buying GME shares, driving the price upwards. Is it a freak, an anomaly like the Flash Crash of 2010? Or is this a sign of something truly new, an important change in market behavior? Something that may become a regular part of the game going forward? The Gamma Process But a double spike, without fundamentals, with outlandish volume statistics (see below)… is a new chimera. They are rare, but explicable, usually as technical adjustment by investors compounded by some sort of crowded trade. Single spikes like GME’s January surge are not unknown.
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