To The Moon

TL;DR: The whales are the only 100% winners here. Whether retail can profit is hit-or-miss.

After I finished writing about the whales' return, on Wednesday someone bought the $GME 20240621 20 CALL$  in 5,000 lot clips split across 12 orders, totaling $36 million in premium. Open interest in these June 21 20 calls swelled to 100,000 contracts.

This sparked a frenzy of discussion across Reddit and other stock forums, with the motivation behind these buys being the prime focus.

Compared to previous option positioning, this latest wave of buying was extremely loud and ostentatious. Earlier, dealers were ultra-stealthy, slicing up orders into tiny 10-lots to avoid tripping large order alerts. This time, the glaringly elevated volumes immediately caught everyone's eye - including those just beginning to trade.

It wasn't just the 20 calls seeing massive OI accumulation either. The 25 and 30 strikes also saw opening 5,000 lot sellers emerge.

Intriguingly, there were also put sellers - 5,000 opening in the 30 puts, and a more discreet 13,000 lot addition to the 20 puts.

Manufacturing Waves

Surprisingly, online commentators maintained relatively muted tones despite the audacious option flows. The top-voted perspectives weren't mindless YOLO calls, but rather theorized it as funds hedging.

The sheer brazenness of the buying seemingly made it too incredible to interpret at face value as an all-out bullish assault.

So why would dealers advertise their accumulation so overtly? Simple - to lure the whole market's attention onto GME options, and in turn entice retail to join the party.

As I mentioned previously, the 2021 GME ramp to $400+ couldn't have happened without short covering, but was turbocharged by a gamma squeeze originating from retail piling into deep out-of-the-money calls. Clueless traders gorged on lottery ticket contracts, forcing dealers to ramp up hedging as the strikes kept getting blown through, sparking a self-reinforcing buy loop.

In contrast, the recent 5/13 move saw virtually no gamma impact - out-of-the-money options weren't even listed until late, while many brokers restricted trading in newly-listed deep strikes on the day. Most retail frenzied into shares, with options volumes remaining muted.

GME's ramp was driven almost entirely by pre-market parabolic lifting before seeing its intraday momentum continually stifled by trading halts - going effectively nowhere.

The whales clearly miscalculated how unsophisticated this latest crop of GME tourists truly were. Based on my lurking, many had no clue about basic market hours, let alone how to trade options.

Lessons learned, it seems the dealers have pivoted to more overt attempts at driving option volumes - shining a bright spotlight to lure fresh money into out-of-the-money lottery tickets in hopes of catalyzing a gamma frenzy.

Who's On Your Team?

What puzzles me is why the whales didn't wait for volatility to settle before reloading. But perhaps this impatience is part of the grand scheme.

Thanks to their aggressive buying spree, implied vols on the 20 calls have now exploded to 247.8% from 190% earlier. We can safely assume all other strikes are also experiencing vol expansions.

We know new traders have a bad habit of gravitating towards the cheapest premium - not the best-priced premium. The original GME gamma craze was fueled by the WallStreetBets crowd going hog wild on ultra-cheap, far out-of-the-money lottery tickets.

With vols getting inflated, relatively speaking, those further out-of-the-money strikes will now appear as the affordable "bargains" to fresh money.

And following the 5/13 ramp, strikes are now listed all the way out to 125 - leaving ample runway for a squeeze if volumes pour in.

So the whales are just waiting for the newbies to take the bait and pour into those ultra-cheap, ultra-far out-of-the-money contracts.

The Market Makers' Counter-Scheme

But is manufacturing a gamma wave really that simple?

Because it's the market makers who get squeezed and have their flesh torn during gamma frenzies. Do you really think they'll just sit idly by until June letting the whales and hordes of dumb money run them over?

Here's a crucial misunderstanding - retail can't naively think the whales are on their team just because there's a prospect of getting carried for a ridesidelong gamma squeeze.

Why wouldn't the market makers want to exploit this very same dynamic to fleece the momentum chasers?

The premise of retail profiting during gamma squeezes is premised on the notion of relentless momentum materializing. But what if the rallies keep getting quashed and upside capped - like on 513? In that scenario, all those out-of-the-money lottery tickets just get smoked as momentum stalls, allowing market makers to rake in premium.

If repeatedly buying a strip of cheap out-of-the-money lottery tickets ahead of an expected ramp was such a golden goose, wouldn't every man and his dog be running these same gamma plays constantly?

The reason they don't is because it's far from a foolproof scheme.

Retail may delude themselves into thinking dealers are on their side, trying to ignite a gamma raid to cash in together against the market makers. But it could just as easily be the case of dealers aligning with market makers to trap and ravage the incoming horde of premium sellers.

Manufactured Waves, Return to Calm

I describe this latest move as an attempt at manufacturing waves - not erecting a skyscraper. Because buildings tend to remain standing, while even towering 50-foot waves inevitably crest and dissipate.

For GME, the odds of upside may be 55/45, but the bears have an ironclad edge - especially via shorting volatility.

But having sufficient capital and resolve to fade insane ramps without flinching is a prerequisite. Those who lack that probably couldn't be warned off even if I tried.

For now, if bullish on GME upside on hopes the whales conjure something, sticking to trading shares affords the cheapest exposure while capping your risk. At worst, it just ends up being a round trip.

As for those long out-of-the-money option lotto tickets - if whales want to set them as the tinder, and market makers aim to be the wick that lights it all up, then may the odds be ever in your favor if you want to roll those dice. Best of luck out there.