"The Chinese Warren Buffett" Duan Yongping's Low-Stakes Pleasure: Riding the Reverse Gamma Squeeze Wave on NVIDIA

Last month, Duan Yongping's $14.4 billion position came to light.
Duan Yongping is not an “options speculator,” he shared that his most commonly used strategy is to sell Covered Calls and Puts.
He shared his experience of short Nvidia, shorted 101 calls, and earned 15000 dollars.

This article is brief and mainly includes the following two aspects:
1. The Reasons Behind NVIDIA's Sharp Decline: The severe overbuying, profit-taking, and the push from the reverse Gamma squeeze contributed to NVIDIA's significant downturn.
2. Analyzing Duan Yongping's Sale of Call Options: Assessing the profit risks associated with Duan Yongping's decision to sell call options.

Why did Nvidia plummet
Nvidia is extremely overbought in the short term.
The RSI indicator is above 90, and strong buying pressure and huge profits prompted some investors to choose a profitable settlement.
In addition,The reverse Gamma squeeze is particularly evident on the eve of an option's expiration date. Stock prices fluctuate abnormally due to liquidation and hedging activities of option holders and counterparties (market makers or institutions).

Especially when a large number of such options expire on Friday, those holding profitable call options may close their positions and achieve profits.

Market makers (bookmakers) buy put options or short sell call options in order to reduce book losses. If the market expects these actions to cause the stock price to fall, then these actions themselves may trigger the stock price to fall.

The specific mechanism is as follows:
1. Initial Stage: Stock prices rise, calls increase, puts decrease, and market makers (dealers) begin to deploy short positions.
2. Turning Point: Stock prices start to decline.
3. Acceleration: The value of puts increases, while option sellers sell stocks to hedge. At the same time, holders of calls that are about to become worthless rush to close their positions, further driving down stock prices.
4. Outcome: A chain reaction forms a continuously reinforcing decline, known as the reverse Gamma squeeze.

II. Can you play Short Call Strategy
As mentioned earlier, you can go short with a long put or short call.
They are all shorting. What's the difference between these two?

Bearish on Nvidia, why would Duan Yongping choose a short doomsday call instead of a long put? He sold Call at an exercise price of 1,000, and the potential risk was greater than buying Put directly. Why doesn't he just buy a 900 Put?

In person, I think that because he's just “not bullish” and not “bearish”.

The rapid decay of theta towards expiration ensures steady receipt of premiums when selling Calls, provided that the stock price does not exceed 1000. In contrast, buying Puts, while offering profit potential from a decline in stock price, requires a significant drop to cover the premium paid.

However, as a minor, I do not recommend that sell Call naked (especially if they are not sensitive to the exercise price of the underlying asset or option).

If the stock price rises sharply, your losses are potentially limitless. Being a seller, the margin requirement itself is high; if the margin is insufficient, the brokerage will buy a call option and automatically close the position.

As I said, Duan Yongping's most commonly used strategy is selling Covered Calls and Puts.

Selling Calls alone carries too much risk. Pairing it with owning the underlying stock, selling when it reaches the strike price for profit, and continuing to hold if it doesn't reach there, makes this options strategy much more conservative and stable.

You are welcome to comment.