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Chris L

How Citron Will Get Gamma Squeezed on the PLTR Trade

Citron shared publicly it thinks PLTR stock is worth $20.


First let’s look at what Gamma is: the first derivative of delta and is used when trying to gauge the price movement of an option, relative to the amount it is in or out of the money. In that same regard, gamma is the second derivative of an option's price with respect to the underlying's price. When the option being measured is deep in or out-of-the-money, gamma is small. When the option is near or at the money, gamma is at its largest. All options that are a long position have a positive gamma, while all short options have a negative gamma.

Understand this and you’ll better able to understand how OP used gamma squeeze:

A gamma squeeze can go up or down, and the mechanics are similar either way. When I say "short gamma" you can think of that as "net short options, with an emphasis on near-dated, held by dealers." A short gamma position gets longer delta as spot drops and shorter delta as spot rises. Delta hedging that position pushes spot further in the direction that it just moved.

The gamma profile doesn't depend directly on the OI, rather it depends on how much short gamma is held by dealers (market-makers). OI doesn't necessarily tell you where the short gamma is. It is a useful but imperfect clue.

OI might show where dealers are long gamma. Imagine a large overwrite by a hedge fund for example.

Dealers may be short gamma that traded OTC and is not reflected in OI. Many of the largest bank trades are made OTC.

A strike with massive OI may be a rev/con traded between two dealers, with no net gamma.

(I refer to dealers because they tend to continuously hedge delta, while most of their customers don't.)

Short gamma is a source, and long gamma is a sink. It's like an electromagnetic field. Strikes where option dealers are short (puts or calls, doesn't matter) act like accelerators of spot price motion, and strikes where dealers are long act like shock absorbers for spot price motion.

Consider a stock XYZ where short interest is very high. Borrow is getting costlier and more volatile, and many short sellers want to lock in their financing rate and limit downside so they buy puts. Dealers provide liquidity and sell ATM puts -- short gamma. Let's say the stock starts moving lower. Those short puts get longer delta as the stock trades lower, so the dealers hedge by selling delta. Their selling action pushes the stock even lower, which exacerbates the problem and forces them to sell more shares to hedge delta until they get further from the strike and the gamma rolls off.

That's a gamma squeeze.

The massive call buying has upended many long-standing market relationships including turning the correlation between VIX and equities on its head. Usually, volatility gauges decline as stock prices rise and risk sentiment remains complacent, but the enormous volumes of call buying have sent volatility prices as well as equity prices higher. Furthermore, the relentless bid for the high beta names such as Tesla and FANGS has forced option dealers to continuously hedge by buying the underlying name which in turn only propels prices higher in a dynamic known as “gamma squeeze”.

notes from a user

$PLTR, Palantir Technologies Inc. / H1

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