Crash-Up! Retail Investors Engineer Another Gamma Squeeze

There’s been a “massive grab” for short-dated lottery tickets in high-flying US growth shares and it’s distorting the market.

What else is new, right? We live in a world where the tail almost always wags the dog. In markets, this manifests most poignantly in spot equities becoming a derivative of their own derivative. The dynamic is acute in so-called “hyper-growth” stocks.

One telltale sign is “spot up, vol up” in richly-valued names which have “been ‘crashing UP’ with vols simultaneously higher on massive grabbing into deep OTM Call optionality from retail punters creating a Gamma squeeze and hedgers covering their Delta risk while overwriters and legacy Call sellers got REKT,” Nomura’s Charlie McElligott said Wednesday, describing the self-fulfilling prophecy that “feasts on itself the higher spot goes.”

Earlier this week, Goldman flagged a “material” increase in single-stock options activity concentrated in record-high call volumes.

“As in previous peaks of single-stock options trading, much of the activity has likely been driven by retail investors,” the bank’s Christian Mueller-Glissmann remarked, noting that quite a bit of the action is confined to a handful of names and sectors “that have been retail favorites.”

It’s thus no surprise that many of the names caught up in the frenzy are hitting records. And it all has implications for the index.

“Mind you, this is coming with a number of other extremes emanating out of the Nasdaq,” McElligott said, noting that MSFT, AAPL, AMZN, TSLA, NVDA, GOOG / GOOGL, FB, ADBE and NFLX now have a 55% weighting, while TSLA by itself is nearly a fifth of XLY (figure below).

Part of this is FOMO. The dramatic reversal in rates (i.e., the short squeeze that helped push yields lower after market participants were max bearish bonds, in early October) helped buoy growth shares at a time when traders and investors were positioned for bear steepening.

Now, anyone who was wrong-footed by the long-end rally is “grabbing back into Growth exposure into the year-end trade,” McElligott said, particularly given that “on the mega-cap Tech side, you get that big uplift into year-end from the buyback bid.”

He went on to note that the Asset Manager net notional in Nasdaq 100 futures is in the 99.1%ile, while Nomura’s Sentiment Index reading for the Tech sector “just printed 98.1%ile since 2004.”

There are a pair of important takeaways.

First (and most obviously), the gamma squeeze Jenga tower is inherently shaky or, as Charlie put it, “prone for sharp reversals on the way lower as options move out of the money and Delta is purged under its own collapse.” On his math, 42% of the Nasdaq / QQQ Delta is coming off at OpEx and 49% of the Gamma.

Second, he noted that put skew in some of the secular growth names is going bid as markets ponder the prospect of another CPI scorcher in December, the assumed read-through for the long-end of the curve and thereby the fate of overvalued duration proxies in equities.