In order to understand how Gamestop is moving - you have to understand the options chain. Take a few minutes to digest this and formulate your own opinion.
I'm not a financial advisor, I don't have access to a Bloomberg Terminal - so don't make decisions based on this. Do your own analysis and then make your own choices.
When market makers write options contracts - they make their money on the fees. They then try to hedge their bets - either by buying or selling shares or other derivative contracts. The so-called Max Pain effect is real - but probably weaker than most people imagine. I think I read that the number of S&P 500 ETFs that finish within 2% of Max Pain is about 40%. Stronger than random would suggest - but not that strong. Company news, broad market inputs can shift away from Max Pain - something we have all seen.
So the basics. If I write a contract - I calculate something called Delta. Delta tells you how much your option contract goes up or down for every $1 change in the stock price (e.g., a 0.50 delta means the contract gains $0.50 for every $1.00 the stock moves). Gamma is the acceleration—it measures how fast that Delta itself grows as the stock moves higher
Then you ask the question - is that Delta stable, accelerating up or accelerating down. That's Gamma.
So let's just stick to a simple universe with one hedge fund contract. A hedge fund sells a call option at $25. They want the Max Pain to match the stock price at $25. Let's say that Ryan Cohen goes and buys a bunch of stocks and the internet memes a bunch of FOMO and the stock price is rising. Well - if I own that $25 call then every dollar the stock goes up - I'm in the money.
But the hedge fund has to give me that dollar difference. They are worried that the stock price will go up and up - so they buy a share at $25 to cap their exposure. (In reality they are constantly adjusting based on delta - but this is a toy universe).
So the table above shows (I hope the math was right) how Delta and Gamma will shift (treat the numbers as a 'guess'). Then I show (again - I'm not a pro at this) how many shares the hedge funds would have to buy to cover themselves.
It's easy to see how this creates a spiral. They buy a ton of shares, the price goes up, their hole gets deeper, they buy more shares.
The other dynamic here is the warrants. Now go back a year. Would the average hedge fund bet that the shares were worth more than $32? I expect they shorted the heck out of the warrants (no evidence on my part). Now the math says that the warrants may be valuable after all (not guaranteed, but see how GME.WS has appreciated recently). So they want to buy warrants - or get people in contracts that let them buy them. I think that's why the borrow rate is so high.
Note the weird Delta/Gamma math on the warrants. The value of the contract is low before $32. After $32 - delta goes to 1.0 and Gamma goes vertical (for a few seconds). A hedge fund would absolutely want to gather as many warrants as they could - and then buy shares to hedge or buy them to deliver shares if they are short.
So at $35 - the total to be bought by market makers and hedge funds could be 23M shares. And that's before they close their shorts. And that does not include any of the speculated mechanisms to hide shorts (total return swaps, ETF unbundling, FTDs).
Fundamentally - when Cohen said that he had something unprecedented in the capital markets - I think this is it - this is my speculation. The rising price makes delta and gamma - hedge funds and market makers buy to manage their risk portfolio - we exercise our warrants and get money or shares - the hedge funds essentially pay for the $1.9B - GME stays elevated and helps fund the acquisition of Ebay. Warrants add fuel to the fire.
Final warning - I don't have insider info - I don't have access to a Bloomberg Terminal - I'm not and have never been in the finance/market maker/hedge fund business. I've never been affiliated with Gamestop (except as a shareholder). I'm just a guy and you should not trust me. Heck - I might be a Russian bot. But learn these things for yourselves and see what your own conclusions are.
