The Tesla Gamma Squeeze Is About To Run Out Of Gas
The recent rally has taken on a life of its own, with a frenzy-like mentality sending the shares higher. For example, on October 25, Hertz announced it would order 100,000 cars from Tesla, while Adam Jonas of Morgan Stanley raised the firm price target to $1200.
The Hertz news is a big deal, with and a massive win for Tesla, and while that may have sparked the rally, the move higher is a result of an epic gamma squeeze.
The Squeeze
We have seen these gamma squeezes across many stocks in recent months. Moderna was one of the last ones highlighted back in July. The concept of a gamma squeeze is quite simple; it is like a short-squeeze but driven by options. It starts with a rise in call volume, which has undoubtedly been the case for Tesla over the past few trading sessions.
Typically, this call volume is for a short-term outlook, with an expiration date that is relatively soon. For Tesla, most of that call volume had been centered around October 22, but since that expiration has passed, it has moved to October 29. Additionally, the strike prices are out of the money, meaning higher than the stock's current value.
The heavy call volume forces the market-maker in Tesla to buy the stock. When customers are buying calls, the market maker is the one selling the calls most of the time. To hedge their book, the market maker then needs to buy the underlying stock. The more calls customers buy, the more stock the market maker needs to buy. Additionally, the more the stock rises, the more stock the market maker needs to buy to stay appropriately hedged. That is, in essence, a gamma squeeze.
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Milenko : "The Tesla Gamma Squeeze Is About To Run Out Of Gas"
Everything Tesla runs on electricity... ;)
So many claims of gamma squeezes, both up and down. So little evidence.
Option skew can also be due to relative enthusiasm about a stock short term, due to recent news, recent price history, etc.
Fundamentally, the news CERTAINLY hasn't gotten worse recently for Tesla. Arguably it's gotten significantly better, with the Hertz deal being the icing on the cake re the probably direction for demand from corporations.
So sure, the stock might calm back down and settle down in the area of $900 or so. But expecting a return to $750, barring actual fundamental bad news seems unrealistic -- unless the whole economy / market takes a meaningful hit.
Brain Gomes Milenko: I think $1094 yesterday may have been a gamma squeeze event. I could see a retracement back down to ~$900, but $775 won’t happen without Chairman Powell turning off the spigot…..