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Short-Squeeze Frenzy and Option Gamma Gearing

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The short-squeeze frenzy continued today with GameStop (GME - Free Report) up over $200, or 150%, at one point this morning.

Just last night, my 20-something son who's in the Marines at Camp Pendleton, and a Reddit user, texted me "This GameStop situation is pretty crazy."

I replied "Yeah too many picking up day trading with lots of free time and easy money from the Fed. Many will get rich temporarily, but lots will also get hurt buying the highs."

The Robinhood leaders of Reddit message boards like r/wallstbets are leading their merry pranksters to fortunes in stocks with high short-interest. Describing themselves as "Degenerates" -- as if "4chan found a Bloomberg Terminal" -- they number 3.1 million on the site.

Besides the big short-interest positions in stocks by hedge funds that are being forced to cover (buy the stock back), there is a unique role that call options can play in this tale of Wall Street's Davids vs. the Goliaths.

To help break it all down, I invited my colleague Dave Borun into Cook's Kitchen today. Dave was a professional options market maker for over 15 years and member of several exchanges including CME and CBOE. He was manager of a 25-person proprietary trading group from 2006 to 2011.

In the video that accompanies this article, Dave explains much of the options dynamics that can help throw gasoline on a short-squeeze bonfire.

To get you started, I highly recommend the article he published yesterday...

How Options Trading is Fueling the GameStop Rally

Dave and I dive into several nuances of these big moves and observe how it could last for several more weeks as new "targets" of professional squeezers, and their followers, are uncovered.

Today's rockets and short-covering crime scenes include AMC Entertainment (AMC - Free Report) , up over 250%, apparel retailer Express (EXPR - Free Report) , up over 350%+ at one point and settling down for +200% now, and headphone maker Koss still surging an astonishing 400%+ at I type at 2pm ET on Wednesday.

You could almost think of the short-squeeze pros, who know how to day trade, as now having an army of Orcs to aid their attacks. They post data about stocks with high short-interest and then rally the troops on the message boards like StockTwits, with dollar signs -- and vengeance against Wall Street Goliaths -- in their eyes.

And cheerleading from the sidelines is a new anti-hero of investing, Chamath Palihapitiya, an early senior executive at Facebook (and now FB critic) who created one of the first big successes with a SPAC (special purpose acquisition company) that helped Richard Branson's Virgin Galactic (SPCE - Free Report) go public in late 2019.

Another rocket of late has been BlackBerry (BB - Free Report) . My colleague Jeremy Mullin, who runs the Counterstrike trading service at Zacks, bought BB on January 8th as a technical and fundamental play using his own data and analysis. Today he cashed in part of the position for a 250% gain never expecting to benefit this much from the current frenzy that began a week later.

Now if we can just get some of the ponies in my stable on the squeeze train! (I kid).

For more details on the options dynamics helping fuel these massive momentum moves, be sure to check out my lengthy interview with Dave Borun.

Kevin Cook is a Senior Stock Strategist with Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators portfolios.

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