Options Activity Hints at Potential Gamma Squeeze for Trump Media Shares

In a reversal of recent trends, Trump Media saw its shares dip by roughly 5% on Thursday morning, interrupting a streak of robust gains. Despite this pullback, the company had witnessed a significant surge previously, with a 16% jump on its trading debut, followed by an additional 14% rally on Wednesday. This rally drove the share price to a peak of $66.22, elevating the company's market capitalization to an estimated $8 billion.

The surge in DJT's stock price, decoupled from fundamental financial metrics, is indicative of a renewed interest in meme stocks. These stocks, often referred to as retail investor favorites, typically defy conventional financial wisdom by rallying independently of the company's financial health. Fueled by speculative trading and hype on social media, their popularity spreads across social networks, drawing in more individual buyers.

According to a report from VandaTrack, retail investors poured a net $6.5 million into DJT on Tuesday, more than three times the net inflow from the previous day. Lucas Mantle, the head of data science at VandaTrack, noted that a hallmark of meme stocks is the frenetic enthusiasm they garner in the market. "TMTG and Reddit certainly have the potential to become meme stocks," Mantle said. "I just need more data on the scale of the capital flows to make that judgment."

Steve Sosnick, chief strategist at Interactive Brokers, commented on the market's current susceptibility to momentum-driven dynamics. One of the signs, he pointed out, is that stock prices are rising irrespective of the fundamentals and are solely tied to price movements. Meme stocks exemplify this mindset.

Looking at DJT's options due to expire on Thursday, March 28—the final trading day of this week—the most active option bet appears to be on the stock surpassing $90. The open interest for calls at the $90 strike price stands at 16,030 contracts, with each contract equivalent to 100 shares.

However, extending the timeframe to the following week reveals a bearish sentiment among options traders. The open interest in put options is concentrated at strike prices below $27.50, with around 10,000 contracts in play.

The most favored options bet for the near term is on the April 19 puts with a strike of $2.50, priced at a premium of $0.02 per contract. Here, the open interest reaches 49,075 contracts. For these options to be profitable—a scenario known as being "in the money"—DJT's shares would need to plummet by 96% from their current levels within less than a month.

Despite the bearish options positions, the weight of the money on the options market leans toward DJT potentially reaching the $100 mark in the foreseeable future.