“‘Squeezing’ short sellers once a game for professionals, is now controlled by brigades of retail investors worldwide“– Paul Ebeling
The Gamma Short is played like this: Usually a ‘whale’ buys a large number of out-of-the-money call options in a single name with a high short interest. The option gives the buyer the right to purchase a share at a higher price, which the broker then hedges by passing on the risk to a counter-party, or by buying the underlying shares themselves.
In thinly issues, the latter causes the share price to rise as brokers scramble to purchase shares on the open market to hedge the risk. In turn, this causes the share price to rise again, forcing brokers to buy even more shares as the value of their exposure grows larger as the share price gets closer to the call options strike price.
In a company with a high short interest like GameStop (NYSE:GME) sits at 102% of shares outstanding this buying pressure is exacerbated by short seller compliance officers closing house positions to avoid excessive losses, which also involves buying back the shares on the open market or loop de loop de loop and the stock jumps over the Moon!
And now instead of the retail investor getting hammered the institutional investors gets hammered. Stocks that the professionals bet against the spiked, while their favorites lost on the selling pressure.
This action has been a Street only game, but in this Age of Communication it did not take long for the success of the ‘long the shorts’ trade to be taken up by retail investors in Asia and Europe and the US who have piled into popular stocks which were being shorted.
Thursday, the benchmark US stock market indexes finished at: DJIA +300.19 at 30603.36, NAS Comp +66.56 at 13337.16, S&P 500 +36.61 at 3787.38
Volume: Trade on the NYSE came in at 1.4-B/shares exchanged.
HeffX-LTN’s overall technical outlook for the major US stock market indexes is Neutral to Bullish with a Very Bullish bias long-term in here.
- Russell 2000 +6.7% YTD
- NAS Comp +3.5% YTD
- S&P 500 +0.8% YTD
- DJIA Unch YTD
Looking Ahead: Investors will receive Personal Income and Spending for December, PCE Prices for December, the Q-4 Employment Cost Index, the Chicago PMI for January, Pending Home Sales for December, and the final University of Michigan Consumer Sentiment Survey for January Friday.
Have a healthy weekend, Keep the Faith!