There is a phenomenon known as the gamma squeeze, in which market makers buy stocks in order to hedge calls that have been sold, which indirectly causes the stock price to rise abnormally. This is similar to the short squeeze in equities, which is a mechanism that triggers account risk and leads to a snowball phenomenon.
The gamma squeeze is not very common, and it takes the right time and the right place for a bullish order to trigger a surge in stock prices. Because options are a illiquid product compared with stocks, options trading volume is large enough to have an impact on stock price trading. The problem is often that after the option is bought, if there is no continuous purchase to follow up, the stock price will fall immediately, and how much the call option is lost.
Therefore, gamma squeeze is more common in small stocks of Internet celebrities, and it is very easy to follow the trend of bullish stocks, and it is very easy for call option buyers to close their positions at a profit and exit safely.
Just on Wednesday, $SoundHound AI Inc(SOUN)$ saw such an unusual rise in its share price and a large option order.
Since 2:20 PM, $SOUN 20240315 6.0 CALL$ has been continuously bought in a rhythm, with a total volume of 54,700 lots, far exceeding the usual volume. The market maker, as the counterparty of the option, can only buy the stock to balance the sale of the call option, and can watch the price of the stock suddenly rise in the second half.
As for why you want to buy at-the-money options, it involves a cold knowledge that the gamma growth of doomsday at-the-money options is exponential, so it is best suited to trigger a gamma squeeze.
Another speculation I didn't mention in yesterday's article is that someone wants to bet on Nvidia gamma squeeze and buy extreme out-of-the-money options to induce further gamma squeeze, since the payouts are cheap anyway and it doesn't matter if they fail.
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