What Is a Gamma Squeeze in the Context of Stock Trading?

Re:What Is a Gamma Squeeze in the Context of Stock Trading? by lordnacho on Tuesday January 12, 2021 @06:25AM (#25745397)

1) Good question. There's a tendency for implied vols to be higher than realised, so you'll tend to lose money holding options. This is a central element in Taleb's Black Swan stuff. The people he was talking about were people like me, and I actually met him in the office for a chat about options stuff once. Basically if you're incentivized to be short gamma, some traders will act on that and blow up now and again.

2) I think so, firms I worked for threw around a fair few index futures to hedge. quantifying it isn't too easy though. A lot depends on how close you are to the strike and the expiry.

3) You can't avoid looking at open interest, but I guess you can weight it by the gamma.

4) Vanna is a cross greek of vol and price. The other missing piece is interest rates, and from that you can imagine a zoo of greeks. But mainly it's the connection between vol and price that matters, there's a slidey thing you use to move the volatility surface when the price moves.

I guess if I were you I'd scrape all the open interest info and see about the relative size of presumed gamma to liquidity in the market. It's a bit of an exercise.

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Re:What Is a Gamma Squeeze in the Context of Stock Trading? by hntrader on Tuesday January 12, 2021 @07:11AM (#25745802)

Thanks, very informative stuff.

(1) and (3): If we're to use open interest (along with the gamma of such open interest), it seems that we have to make specific assumptions about whether options' market makers are going to be net short/long, and by how much, in each specific contract, in order to perform the calculations. What such assumptions do you think that we should use for that, and I wonder if there's a way to make it more accurate than simply assuming "100% of this open interest in this specific put is held short by options market makers"? That seems to be the assumption made in [1], which is definitely very incorrect but maybe it's the best we can do?

(4) So I guess flow that results from vanna hedging (and the other greeks aside from delta/gamma) is pretty small then. A number of people on Twitter make a big deal out of vanna hedging - they seem to think it can predict moves in the underlying, but they must be mistaken if not much flow comes from it as a result.

[1] https://squeezemetrics.com/download/white_paper.pdf

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Re:What Is a Gamma Squeeze in the Context of Stock Trading? by lordnacho on Tuesday January 12, 2021 @08:36AM (#25746628)

I didn't mean to suggest that vanna isn't important, it's just part of the same mix of things to think about when prices/vols/rates move. Somehow it never came up much in conversation by that name, but it was a thing to think about.

The squeezemetrics people seem to have quantified it, it's actually quite impressive. The GEX and VEX thing seems to be what you are alluding to, and they seem to have crunched the numbers.

Browsing the papers it seems they assume that the customers are selling the calls and buying the puts? I think it makes sense, it's more sensible than saying all the open interest is one way on the market makers.

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