When GME's 0DTE options meet a Gamma Squeeze, can the 1000x surge happen again?

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Behind all this excitement is a name you should know—Roaring Kitty.

Who is it? He was a pivotal figure in the GameStop saga of 2021, rallying day traders to challenge short-sellers and making a lasting impact.

Today, June 3rd, Roaring Kitty, known on Reddit as DeepFuckingValue, posted his second explosive message of the year.

In his post, he revealed that he holds 120,000 GameStop call options with a strike price of $21 expiring on June 21st, along with 5 million shares of GME stock.

That's quite a significant move, and it undoubtedly sparked a strong reaction among investors, leading to a sharp increase in GME's pre-market trading price.

As the GME price rises like a tempest, is the market brewing another Gamma Squeeze?

With short-term options expiring this week, what surprises lie ahead?

A Gamma Squeeze is a relatively new term in the stock market. To understand it, let's break down two important concepts: Gamma and market makers.

Gamma measures how much the Delta of an option will change when the stock price changes, while Delta shows how much the price of an option changes for a $1 move in the stock price.

Delta is like the speed of a car (how fast the option price changes).

Gamma is like the accelerator pedal (how quickly that speed increases).

So, a higher Gamma means Delta can change faster, making the option price more sensitive to changes in the stock price.

Market makers are indispensable players in the financial markets.

When you buy or sell stocks/options, your counterpart is often a market maker, not another individual investor.

They are usually large investment banks or hedge funds acting as "peacemakers" in the market, reconciling prices between buyers and sellers to ensure smooth transactions.

The options market operates in a similar way. When many people buy call options, market makers step in to sell these calls.

However, unlike gamblers, market makers aim to stay neutral and hedge their risks. They do this by buying the underlying stock while selling call options.

It's important to note that the potential loss from selling a call option can be infinite. To mitigate this risk, market makers use a Delta hedging strategy, which involves buying the underlying stock to balance the risk of selling Calls.

Take GME as an example. Influenced by lively discussions on social media and widespread expectations of a price increase, investors now rush to buy a large number of near-expiry, slightly out-of-the-money (OTM) call options.

These near-expiry options already have a high Delta value. If GME's stock price rises, market makers need to buy more stock to manage their Delta risk.

As the stock price continues to climb, the Gamma value of these near-expiry options – which is the rate at which Delta changes – also increases.

This means that to maintain a good hedging position, market makers need to buy more stock to adapt to this accelerated Delta change.

The stock price is driven up further, causing it to rise even higher.

As the stock price skyrockets, more OTM Call options become in-the-money (ITM), and the premiums on these options can surge, potentially increasing by hundreds or even thousands of times.

0DTE options, or Zero Days to Expiration options, are typically options in their final week of trading, often referred to simply as Expiry Options.

Expiry Options are highly attractive because of their potential for high returns in a short period. They allow investors to "bet small with limited losses" due to their low initial cost.

Their Gamma values are extremely sensitive, making them a powerful tool for traders looking to capitalize on rapid price movements. However, this sensitivity also introduces significant risk, and investors must stay vigilant as high reward often comes with high risk.

These options are like a box full of variables; you never know what kind of surprise or shock they might bring.

When a Gamma Squeeze occurs, the value of Expiry Options can skyrocket, sometimes increasing by tens or even hundreds of times, as demonstrated by Nvidia last week.

Trading 0DTE options, especially under the influence of a Gamma Squeeze, has become a popular strategy for those seeking high returns.

However, approaching this with a gambling mentality can lead to significant disappointment.

Here are several key considerations to keep in mind:

For investors keeping an eye on GME options, mastering the options chain is an essential skill.

With the Options Chain feature on moomoo, you can quickly see essential details for each option contract, such as the premium, strike price, and expiration date.

It also allows you to quickly filter and choose the right options for your strategy.

Here's how to access this feature.

An options price calculator can not only help you assess how the option premium changes as the stock price moves, but also help formulate a reasonable trading budget based on these predictions.

By analyzing how reasonable an option is priced, you can more accurately identify the best timing for opening and closing this contract, and quickly execute take-profit or stop-loss orders at appropriate price levels.

It is especially helpful when trading options on volatile securities like GME.

The price of expiry options can fluctuate greatly, so it's crucial to take profits in a timely manner.

Use the conditional order feature on moomoo to set up automatic buy and sell orders when specific price points are reached.

This allows you to lock in gains or manage losses automatically, even if you can't constantly monitor the market.

For example, let's say you've purchased an expiry option for GME and want to take profits when it reaches a 30% gain.

By setting a attached order, the system will automatically sell the option once it hits your target, ensuring you secure your profits promptly.

On moomoo, we can use Options Chain to quickly identify contracts with potential and Options Price Calculator to assess the potential gains and risks in different volatility scenarios.

Once a decision to buy is made, you can set up attached orders to ensure automatic execution of trades when specific price targets or time points are reached, thus maximizing profits or controlling losses.

In the context of a Gamma Squeeze, trading expiry options could potentially offer higher returns, but the risks are equally significant. It is recommended to participate with a small amount of capital to control risk.

Be prepared and avoid actions that could lead to significant losses. Instead of blindly chasing a Gamma Squeeze, respond prudently to protect your investment with intelligence and patience.

That's all for today. See you next time!