Personal Finance & Money Asked by ZeroPhase on July 13, 2021
I’m pretty sure AMC is going to hit crazy prices in a couple of weeks to months. A Korean AI traded fund just dumped Facebook and Wallmart for AMC. Plus, I got in a pretty big fight with some multimillionaire shorting the stock, after joking about selling each share for $2 mil each. I have no idea how high the gamma squeeze will be if it comes, nor how to calculate the volatility of it for exiting at the right time.
AMC keeps getting added to the Threshold Security List, and eventually it’s going to stay on there for 13 consecutive days, and force all of those shorts to close. I think they’re getting emotional and have way doubled down on buying shares that do not exist. Would make sense for normal stocks; but, everyone buying AMC doesn’t care about any fundamentals. Just the short term effect of there being more shorts than available to buy. I do think this could be a profitable company depending on how the Apes play this post spike.
What I’ve figured out so far is I want to use a percentage based trailing stop loss to maximize profits, while minimizing risks. When the event happens it’s definitely going to be a sellers market, and ask seems like the right price to base the volatility percentage on. I heard you want to toss a multiplier in too. Don’t know if I need one for gamma squeeze. Everything I’ve read was using more long term volatility indicators, and I don’t believe those apply for a gamma squeeze.
I found a bunch of formulas for calculating gamma here. But, I’m not sure which to use per say for this stock, and I don’t know how many data points should be collected the day of. I don’t believe dividends should matter with the sudden spike. AMC has not paid dividends since 03/06/2020 either. Are any of these formulas right at all for this situation?
This is clearly something skilled day traders know. All of the investors I know do not mess with day trading. This includes very wealthy traders, and they could not help me on this. How do I calculate gamma accurately enough once the price starts spiking up crazy? Where would I find all of the data needed?
Gamma is a function of current option price and is easily calculated. It tells you how fast delta is going to change per point move in the underlying. Its current value tells you nothing about how much the "underlying" is going to move up or down. And there's no need to learn how to calculate the value of gamma because any decent broker (even web sites) provide the Greeks.
A “gamma squeeze” involves massive buying short-dated call options. In order to offset their negative delta, intuitional investors who are short the calls (negative delta) must buy shares of the underlying stock to hedge their short positions, further fueling the short squeeze.
For lack of a better analogy, there's a huge tropical storm or hurricane coming. The town's river is poorly protected (levees and sand bags that resist overflow) and the town is going to flood. Question: How much of the town is going to flood? That depends on how much excess water there is and how fast it arrives. The more there is and the faster it pours into town, the worse the flooding.
A gamma squeeze is similar. How much flooding is there going to be (huge share buying)? How fast will that share buying hit the market? How much resistance is there going to be (willing sellers)? All of these are unknown so asking where the top will be (best price to sell at) is also unknown and not predictable.
As one who has invested as well as utilized options for decades, if I were lucky enough to be on the right side of a gamma squeeze, I'd look to hedge my gains as they accrued. That means either an opportunity loss (capping gains) or throwing some of the accrued gain away to hedge downside loss of profit. This would require option literacy and the ability to make quick decisions in the moment since volatility would be wild during the squeeze.
Answered by Bob Baerker on July 13, 2021
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