The rally year-to-date has certainly excited the meme stock crowd … Coming into yesterday you had some massive moves that reached highs of:

AMC – +69%

BBBY – +360%

PTON – +58%

CVNA – +101%

COIN – +82%

RIOT – +102%

The playbook is simple … accumulate calls in heavily shorted stocks above the market … Then as option dealers short the calls they buy stock to delta hedge their book … High prices trigger a short covering rally. 

There is a catch and understanding how this trade is forced to be unwound gives you an edge to reaping easy profits … Today, I’ll lay it out for you … 

Monthly Expiry Forces the Unwind

Let’s take a look at Carvana (Ticker: CVNA). The stock has short interest near 65%, meaning 65% of the available floating supply is borrowed against short positions. 

That is a stock that is for squeezing potential. 

Notice the table below illustrating the last 5 trading days for CVNA. On Jan-11 CVNA was trading under $4.5. The Max Gamma strike is a key indicator because it reveals how the daily option flow impacts the open interest at strikes above the market. 

Obviously, traders chose to accumulate the 8 calls and on Jan-12 CVNA rallied from $5.20 to over $8.00. 

Gamma kicked in as the stock price moved towards the 8 strike forcing dealers that were short the 8 strike to buy up stock and rebalance their delta-hedged book. 

The squeeze was on … Notice how once the gamma built up at the $8 strike the percentage of gamma that will expire through OpEx on friday exploded. 

If you understand the game, gamma and what happens through expiry you can put the odds in your favor.

Bring It Home 

I did two trades this morning on the early rally, I sold call spreads in the Dow Jones Index ETF (Ticker: DIA) for a nice credit. DIA has 50% of net gamma expiring on Friday. 

I also bought a put spread on the iShares High Yield Corporate Bond ETF (Ticker: HYG), which also has 50% of its net gamma expiring on Friday.

These two fit into my overall fundamental view as well and sometimes a little edge gained via option positioning can make all the difference. 

Stay tuned for more details on expiration and trade ideas in the days ahead … Until then …

Live and Trade With Passion My Friends,

Griff