{"id":115821,"date":"2021-06-03T21:31:31","date_gmt":"2021-06-03T21:31:31","guid":{"rendered":"https:\/\/fin2me.com\/?p=115821"},"modified":"2021-06-03T21:31:31","modified_gmt":"2021-06-03T21:31:31","slug":"explainer-what-is-a-gamma-squeeze-and-how-did-it-drive-up-amcs-stock-price","status":"publish","type":"post","link":"https:\/\/fin2me.com\/markets\/explainer-what-is-a-gamma-squeeze-and-how-did-it-drive-up-amcs-stock-price\/","title":{"rendered":"Explainer: What is a gamma squeeze and how did it drive up AMC's stock price?"},"content":{"rendered":"

NEW YORK (Reuters) – Shares of AMC Entertainment Holdings Inc surged to a record high this week in a blistering rally that again highlighted how an arcane options market dynamic known as a gamma squeeze can super-charge stock price gains.<\/p>

FILE PHOTO: Closed signs are seen on an AMC Theatre during the outbreak of the coronavirus disease (COVID-19), in New York City, U.S., April 29, 2020. REUTERS\/Brendan McDermid<\/figcaption>

WHAT IS OPTIONS GAMMA?<\/h2>\n

AMC\u2019s rally was partly fueled by heavy trading of equity options. These financial derivatives give buyers the right to buy or sell shares at a fixed price in the future, depending on where the stock price is.<\/p>\n

As the share price moves in the normal course of trading, the value of these derivatives fluctuates with the changing probability of the options buyer exerting that right.<\/p>\n

These changes are captured through a range of mathematical calculations, one of which traders call a gamma.<\/p>\n

Anyone who sells options is \u201cshort gamma.\u201d Gamma is highest when the strike price of the options sold is very close to that of the underlying stock.<\/p>\n

WHAT IS A GAMMA SQUEEZE?<\/h2>\n

Market makers who sell options may ultimately have to deliver the underlying stock, so they risk heavy losses if they have to pay more than they bargained for.<\/p>\n

To hedge their exposure, they often buy or sell shares of the underlying stock.<\/p>\n

In the case of AMC, hordes of call options buyers left market makers with a massive short gamma position that grew as the share price inched closer to the high strike prices held by bullish investors.<\/p>\n

As the share price skyrocketed, market makers bought AMC shares to offset their exposure, adding more fuel to the rally, analysts said. That is a gamma squeeze.<\/p>\n

CAN GAMMA SQUEEZE WORK BOTH WAYS?<\/h2>\n

Yes. Market makers may be said to be short gamma from either selling calls or puts. When a stock is falling, market makers are highly motivated to sell the stock to hedge their exposure.<\/p>\n

However, a downward squeeze on shares from gamma-induced selling is generally less extreme, compared with upwards buying pressure, analysts said.<\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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