The Robinhood Double Squeeze

GGME, AMC and, to a lesser extent, NOK are in the midst of two squeezes at once.

The first is a short squeeze.

A short squeeze is caused when a stock starts to rally and has TOO much short interest.

This is the case with these names.

Let’s use GME as an example.

GME has short interest north of 60% of its “float” (the industry word for tradable shares).

The squeeze was kickstarted by a strong rally in GME.

With a rally, the margin to be short (the cost to be in a short position) starts to go up.

The increasing margin causes some of the shorts to have to bail, meaning they have to buy the stock back … 

This causes the stock to rally more, catching the attention of MOMO (momentum) traders and enticing them to buy. (And some of these traders are algos with BIG money behind them.)

Anyway, this puts EVEN MORE pressure on those who are short GME — and it rallies more.

In, um, short … the short builds on itself.

Add in a serious uptick in GME “cult following” and GameStop did to shorts in a week what TSLA will normally do in three months.

More Squeezin’
We would have seen a NASTY rally in these names with the short squeeze alone.

But there is a second culprit!

A GAMMA squeeze.

I want to show you a report of the most active option names from Trade Alert:

Notice that 3 of the top 5 names are the stocks that are hitting the headlines

This is because there is FURIOUS option buying in names like GME.

The option buying is not all over the months, though … it is EXTREMELY concentrated in short-dated options.

Short-dated options have a TON of GAMMA.

Gamma is the Greek that measures an option trader’s risk-to-price volatility (movement).

If every customer is buying call options, that means option market makers are selling calls, putting them extremely short call options.

In order to reduce risk, market makers buy stock against the short position …

That way, if the stock rallies they don’t lose their shirt.

This is called delta neutral trading. Each time the stock moves up, the market makers buy more stock to reduce their risk.

If there is a LOT of open interest on a strike, it can cause the stock to move up quickly…

This again gets the MOMO traders going (and those Algos).  

This pushes the stock even higher and, you guessed it …

The market makers have to buy more stock.

In both of these cases, whether short options or short stock, a strong move higher in the stock can cause those needing to buy to essentially contribute to their own destruction.

The next thing you know, a stock has made an incredible move, and the pros, both hedge funds and market makers, take a licking.

Here is the good news … I am going to show you how I can spot these blow-ups BEFORE they happen during a special live event TONIGHT at 8 PM ET.

In addition, I have a quick 8-minute video below where I walk you through how to spot both a short and a gamma squeeze as they happen …

Watch the video here:

Your Only Option,

Mark Sebastian

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