Friday saw a record $2.6 TN trading in notional S&P 500 options with a heavy skew toward call buying (almost 60%). The concentrated call purchases created a textbook gamma squeeze: dealers who had sold calls took on negative gamma and were forced to buy futures and equities to remain hedged, mechanically amplifying the rally. But Friday’s Gamma squeeze was unusual to say the least. Normally when stocks go up, the VIX (fear/volatility gauge) falls. But on Friday, stocks were rising and VIX is staying high/rising because traders are aggressively buying call options on AI stocks, forcing market makers to buy more shares and helping drive a gamma squeeze higher. The speculative call buying has become so aggressive on Friday that market makers were being forced to hedge at increasingly higher prices. When traders aggressively buy calls, dealers often take the opposite side of those trades and are then forced to buy the underlying stocks or index futures to remain hedged. That hedging activity pushes prices even higher, which triggers even more call buying, creating a reflexive feedback loop that can become self-reinforcing. The $2.6 TN turnover notional in S&P500 options is staggering to say the least. In these options, retail share is at new highs, driven by Tech. The most traded options were in the following names, echoing previous weeks: TSLA, MU, NVDA, GOOGL/GOOG, AMD, META, AMZN, SNDK, INTC and AAPL. We believe we are in the final stages of a bubble for sure. We believe Friday’s gamma squeeze should be a signal to exercise caution for investors. Chasing parabolic moves fuelled by leverage and options momentum may feel safe while prices are rising, but history repeatedly shows that the final stages of a bubble are often the most dangerous. The simple passage of time will cause dealers to start to sell even if the market remains up here (charm). And likewise, if tensions in the Middle East don’t pick up and implied vol falls, dealers will have to sell down their hedges (vanna). While above are just mechanics, the important takeaway is that investors need to step away from these final stages of melt up from a risk reward perspective.
