The Delta of the weekly AMC $32 calls were $0.55
What does that mean?
It means for every $1 move the stock rises, the options price increases $0.55. In this case, the option of the call would go from $3.63 to $4.18.
Of course, I am only referring to how Delta affects the options price. Other factors like time and volatility play a role.
All things being equal, the Delta informs us how much we can expect the price of the option to change with every $1 move in the stock.
The Delta of a call option will range from 0 to 1.
0 Delta options are those that are deep OTM, where a 1 Delta option is deep ITM.
The Gamma of an option tells us how much we can expect the Delta to change with every $1 move in the stock price. It is a "second-order derivative."
In the above example, the weekly AMC $32 call had a Gamma of $0.04. In other words, if the stock rises from $32 to $33, the Delta will change from $0.55 to $0.59.
The Delta and Gamma of an option will be the most sensitive to price movements for At-the-money options.
Gamma Squeeze Explained
As of last night's trading, over 20K contracts of the weekly AMC $59 calls in open interest.
The Delta of those options was $0.02, and the Gamma was $0.005. Now it doesn't look like much, but here is how it gets interesting.
At expiration, the Delta of a call option will either be 1 or 0. That is, it is either going to expire in-the-money or worthless.
Typically, market makers will hedge off their Delta risk by either buying or selling stock.
Let's say a hedge fund comes in and buys 1,000 $59 calls at a Delta of 0.02.
That is the Delta equivalent of 2,000 shares. The market maker is short 1K calls and they may decide to buy 2K shares to hedge off their directional risk.
However, 1K call contracts leverage 100,000 shares. If for whatever reason the price of AMC continues to spike higher, the gamma will tell us the real risk involved.
If an option was expiring today and it was OTM by $1, the Delta of that option would be low. However, the Gamma would be high.
Why? Because if the option was to move from OTM to ITM the Delta would explode.
Gamma is important to watch for near term options that are expiring. Because options move so fast as they near expiration it is critical that the market maker is also aware of their Gamma risk.
Let's say the $59 calls are in play, they may have to buy significantly more shares than the 2K initially bought to be hedged.
There were 26K contracts of the $73 weekly calls in AMC in open interest as of yesterday. These have extremely low Delta's and Gamma's.
However, if you short these calls and measure risk by Delta exposure alone, you could be in a world of pain if the stock price soars to the strike price.
OTM options are hard to hedge when options approach expiration. A relatively low risk trade based on the Delta greeks can balloon into a high-risk one if you have short options.
Is Gamma Squeeze A Strategy?
Buying OTM call options in hopes of squeezing the market maker or traders who are short the calls is not a strategy. However, in AMC, the stock also has a high short interest, which can potentially cause a short-squeeze.
It also has a positive narrative at the moment which is helping its stock price.
What makes AMC interesting is the positive narrative around the company, and the high short interest in the stock.
That said, I believe that more traders will be on the lookout for the next "gamma squeeze" trade.
If you look at the short interest, there are a few names that come to mind:
- Workhorse Group (WKHS) short interest roughly 45%
- Clover Health (CLOV) short interest roughly 40%
- Blink Charging (BLNK) short interest roughly 35%
- SKILLZ (SKLZ) short interest roughly 34%
- Lemonade (LMND) short interest roughly 33%
Which one is next?
Reply to this email and tell me what you think. I'll read it and share with you my findings shortly. If there is one not on the list that you think I should know about, please reply and let me know, I'd love to hear from you.
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