Pulse of the Market - June 2021
Alright, this was the wildest month yet. I want to discuss two things: 1) How $AMC created a monster gamma squeeze and 2) The new social media scam: #NotFinancialAdvice
Analyzing the Flow- The Creation of the $AMC Gamma Squeeze
I think everyone reading has heard about how $AMC stock went to the moon. Maybe you saw some meme page pumping it, or heard your little cousin bragging about his $100 in $AMC gains. What you might not realize is while yes the average retail investor did help push $AMC up to an insane price, it was institutional hedge funds that moved this stock by buying BILLIONS of shorted dated call options in order to orchestrate a gamma squeeze.
What is a gamma squeeze: A “gamma squeeze” is a trading terminology that refers to massive call buying leading to higher stock prices, which leads to more call buying, a higher stock price and so on. Calls, a form of option, increase in value when the price of the underlying stock increases.
So to explain it more simply, hedge funds started buying call options (or contracts to buy 100 shares of a stock) when $AMC was in the $8-13 range (see bubble chart below). As they continued to buy millions in call options, market makers (like Citadel) are forced to delta hedge, or buy the underlying shares of $AMC, in case the options purchased are deemed in the money. If the option contract goes into the money, the hedge fund that bought the YOLO (You Only Live Once) call option can exercise that option, forcing the market maker to deliver 100 shares of $AMC. As the price goes higher and more YOLO call options go into the money, a gamma squeeze ensues where the price moves exponentially higher, which forces market markers to keep buying shares at higher prices to meet their option obligations. I also linked a graph on the call volume flow for June 1st, which shows almost $250M bet on one strike of June 17th calls….
Then of course retail traders jumped in and bought shares along with the Tik Tok crowd and that's when all hell broke loose. All the call options started going into the money causing a cascading effect where the $AMC stock price moved violently upwards as 1000s of call options worth billions of dollars got exercised. Lastly, when you combine lots of call options with a high short interest, you get an uncontrollable tsunami. Shorts run for the hills and cover their position knowing other hedge funds are buying billions in calls to squeeze them out of their short positions.
If you love memes, here are some of the best #AMCtothemoon memes:
AMC longs vs AMC shorts:
The Wolf of Wall St ($AMC Edition):
The Key to Success:
Analyzing data allows for less emotion. Data doesn't lie. Is $AMC overvalued on a fundamental basis? Absolutely. Trading at 48x EV/ Revenue multiple on the June 2nd close, with over $11B in debt compared to only $800M in cash, it's grossly overvalued. But, this trade was about riding the monster gamma squeeze. If you caught on early, analyzed the call volume data, and rode it with the big whales (aka the hedge funds), you made a killing.
As for the narrative pushed by CNBC and social media, Reddit bros/ gals aren't the ones buying millions (billions in total) in short dated call options or moving a 14B market cap stock this way (over 100% to 28B on June 2nd). These are hedge funds, with billions under management, placing risky bets on YOLO call options to try and meet their quarterly hurdle rate. But if you know a Reddit bro/ gal trading millions in weekly call options, let me know because I would leave to meet him or her! Here is a tweet that perfectly captures the insanity that happened on June 2nd. $4.5B (yes with a B) in options traded in one day. But yes, this was a bunch of Redditors buying the stock *sarcasm*
Source for the graphs: https://unusualwhales.com/
Disclosure: Didn’t have any $AMC shares and just watched the mayhem on the sidelines
The Next Social Media Fraud: #NotFinancialAdvice
Kim Kardashian. We all know her. She is extremely rich and wants to make even more money. What is the easiest way to make money these days?: Post about an alt coin ponzi scheme to her millions of followers with the hashtags #NotfinancialAdvice #Ad
When you can create a new coin with a couple easy steps then pump it to unsuspecting teenagers, it might just be the easiest way in the world for celebrities to make money. With diet pills, makeup, etc you actually have to convince people the product makes you skinny, or more beautiful, or provides happiness in their life. With a new trash coin, all you have to do is add max after the well known crypto Ethereum, and then get rich quick believers to flock to buy the coin.
The next and final step is pretty simple: After you pump the trash coin, now it’s time to dump it and run away with the loot. Mark Cuban did this to perfection with the alt trash coin: Titan coin ($TITAN)
Cuban tweeted about buying the new DEFI coin $TITAN, which went to the moon (from basically $0 to $60) in 20 days. But after the FOMO (fear of missing out) kicked in, $TITAN collapsed from $60 to $.000003 (IN 24 hours). While I feel bad for the idiots who got rug pulled, it is now nicknamed “The Cuban Missile Crisis”, which makes the story 10x more entertaining.
Conclusion/ Final Thoughts
The market has been rewarding/punishing casino type behavior with the likes of $AMC and alt coins. In one case, all you had to do was ride the wave and you walked out like a bandit. On the other hand, all you had to do was not listen to Kim Kardashian, Mark Cuban, Soulja Boy, or the 50 other celebrities telling you to buy trash coins. I guess if 90% of the population will listen to celebrities political views, you might as well listen to their stellar #FinacialAdvice.
Update from last week: Dogecoin has now fell back to around 20 cents as of 6/22. Looks like most people bet red on the Dogecoin roulette wheel and the market showed black. With no real support in the chart, the Dogecoin army better find some more stimmy checks to keep the coin afloat.