The dust may be settling on the Reddit madness, but the sudden rise of this disruptive cohort is causing some stock-options traders to ask: what if the retail army decide to do it all again, by forcing prices down instead of up?
It’s a tail risk few institutional pros had considered until last week’s market drama when day traders pounded hedge funds by bidding up their most-shorted stocks.
While they were igniting a now-famous 400 per cent surge in GameStock, the cohort also loaded up on call options. That forced dealers to buy the underlying equities to hedge their own exposure, pouring fuel on the rally in stocks loved by the Reddit crowd and hated by Wall Street.
Now, some options experts say the message-board masses could exploit this so-called gamma squeeze in reverse, by weaponising puts to power a sell-off. While the Reddit crowd overall prefer bullish bets for now, plenty of bearish positions were being placed on GameStop as it plummeted back to Earth.
With retail crowd setting their sights on silver and biotech companies this week, traders can be forgiven for fretting what’s next for a crowd seeking to exploit wrinkles in the relationship between stocks and options.
“Put buying en masse would add to dealers’ short put positioning and could create much more severe structural leverage imbalance to the downside,” said Cem Karsan, founder of Aegea Capital Management and a former options market maker.
Mr Karsan, who has 24,000 Twitter followers, floated the scenario on The Derivative podcast last week.
Once an obscure dynamic in the market plumbing, gamma squeezes are the talk of both Wall Street and the amateur crowd following the GameStop drama.
It goes like this. When an investor buys a call, the dealer who sold the contract will typically hedge by purchasing the underlying stock. The more the latter rises toward the option’s strike price, the more shares the market maker will theoretically have to buy. That can supercharge stock prices as shares rise and dealers buy more.
And the dynamic works in reverse, too.
Dealers who have sold puts will hedge themselves by selling the underlying shares. As the price drops toward the option’s strike, they will sell more and more.
A post on r/WallStreetBets on Tuesday described this very market quirk.
Last year’s tech rally was fueled in large part by a gamma squeeze spurred by call buying in names like Netflix and Apple. In a world of soaring megacap valuations, the thinking goes that the same forces could be unleashed in the opposite direction with derivatives betting against such names.
“Where a put-option gamma squeeze becomes much more dangerous is in mega cap tech names that comprise the indices,” according to Garrett DeSimone, head quant at OptionMetrics, a data provider. “These are much more liquid stocks and have the ability to impact the broader indices and ETFs.”
According to Credence Capital Management trader Yannis Couletsis, that kind of liquidity would be the very thing to save the situation. He reckons even if a negative gamma squeeze occurs, real-money buyers are likely to step in and that will ensure the fallout is short-lived.
“I would not expect it will provide dramatically meaningful fuel to the fire except for the first couple of days,” the volatility trader said.
However long it lasts, the effects could be significant. A particular concern is that a gamma squeeze to the downside could actually be far more powerful than one that sends stocks higher. That’s because market makers are short puts across their business thanks to persistent demand for stock hedges.
It’s different for calls, where liquidity providers are overwhelmingly long thanks to the boom in call-overwriting strategies that involve selling the bullish contracts, according to Aegea’s Mr Karsan.
All that means if the masses get involved in put buying, it might force dealers to offload the underlying shares at a fast clip and trigger waves of selling.
“Negative gamma is much riskier because downward volatility is a stronger feedback loop,” said OptionMetrics’ Mr DeSimone.
FROM%20THE%20ASHES
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The stats
Ship name: MSC Bellissima
Ship class: Meraviglia Class
Delivery date: February 27, 2019
Gross tonnage: 171,598 GT
Passenger capacity: 5,686
Crew members: 1,536
Number of cabins: 2,217
Length: 315.3 metres
Maximum speed: 22.7 knots (42kph)
Name: Colm McLoughlin
Country: Galway, Ireland
Job: Executive vice chairman and chief executive of Dubai Duty Free
Favourite golf course: Dubai Creek Golf and Yacht Club
Favourite part of Dubai: Palm Jumeirah
French business
France has organised a delegation of leading businesses to travel to Syria. The group was led by French shipping giant CMA CGM, which struck a 30-year contract in May with the Syrian government to develop and run Latakia port. Also present were water and waste management company Suez, defence multinational Thales, and Ellipse Group, which is currently looking into rehabilitating Syrian hospitals.
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MOUNTAINHEAD REVIEW
Starring: Ramy Youssef, Steve Carell, Jason Schwartzman
Director: Jesse Armstrong
Rating: 3.5/5
The biog
Name: Younis Al Balooshi
Nationality: Emirati
Education: Doctorate degree in forensic medicine at the University of Bonn
Hobbies: Drawing and reading books about graphic design
Frankenstein in Baghdad
Ahmed Saadawi
Penguin Press
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UAE currency: the story behind the money in your pockets
More from Rashmee Roshan Lall
Muslim Council of Elders condemns terrorism on religious sites
The Muslim Council of Elders has strongly condemned the criminal attacks on religious sites in Britain.
It firmly rejected “acts of terrorism, which constitute a flagrant violation of the sanctity of houses of worship”.
“Attacking places of worship is a form of terrorism and extremism that threatens peace and stability within societies,” it said.
The council also warned against the rise of hate speech, racism, extremism and Islamophobia. It urged the international community to join efforts to promote tolerance and peaceful coexistence.
if you go
Getting there
Etihad (Etihad.com), Emirates (emirates.com) and Air France (www.airfrance.com) fly to Paris’ Charles de Gaulle Airport, from Abu Dhabi and Dubai respectively. Return flights cost from around Dh3,785. It takes about 40 minutes to get from Paris to Compiègne by train, with return tickets costing €19. The Glade of the Armistice is 6.6km east of the railway station.
Staying there
On a handsome, tree-lined street near the Chateau’s park, La Parenthèse du Rond Royal (laparenthesedurondroyal.com) offers spacious b&b accommodation with thoughtful design touches. Lots of natural woods, old fashioned travelling trunks as decoration and multi-nozzle showers are part of the look, while there are free bikes for those who want to cycle to the glade. Prices start at €120 a night.
More information: musee-armistice-14-18.fr ; compiegne-tourisme.fr; uk.france.fr
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Sholto Byrnes on Myanmar politics
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Recent winners
2002 Giselle Khoury (Colombia)
2004 Nathalie Nasralla (France)
2005 Catherine Abboud (Oceania)
2007 Grace Bijjani (Mexico)
2008 Carina El-Keddissi (Brazil)
2009 Sara Mansour (Brazil)
2010 Daniella Rahme (Australia)
2011 Maria Farah (Canada)
2012 Cynthia Moukarzel (Kuwait)
2013 Layla Yarak (Australia)
2014 Lia Saad (UAE)
2015 Cynthia Farah (Australia)
2016 Yosmely Massaad (Venezuela)
2017 Dima Safi (Ivory Coast)
2018 Rachel Younan (Australia)
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The National's picks
4.35pm: Tilal Al Khalediah
5.10pm: Continous
5.45pm: Raging Torrent
6.20pm: West Acre
7pm: Flood Zone
7.40pm: Straight No Chaser
8.15pm: Romantic Warrior
8.50pm: Calandogan
9.30pm: Forever Young
BMW M5 specs
Engine: 4.4-litre twin-turbo V-8 petrol enging with additional electric motor
Power: 727hp
Torque: 1,000Nm
Transmission: 8-speed auto
Fuel consumption: 10.6L/100km
On sale: Now
Price: From Dh650,000
The%20specs
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About Okadoc
Date started: Okadoc, 2018
Founder/CEO: Fodhil Benturquia
Based: Dubai, UAE
Sector: Healthcare
Size: (employees/revenue) 40 staff; undisclosed revenues recording “double-digit” monthly growth
Funding stage: Series B fundraising round to conclude in February
Investors: Undisclosed
Company%20profile
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