Lily Profile picture
13 Jan, 11 tweets, 3 min read
How the Game Ends
We're all aware stonks only go up, and that's mostly due to the dynamics of how a call skew works. While put skews work the same way fundamentally, a stock's lowest price is $0, so put skews can't really continue forever. A great example of a long-lasting call
skew is Tesla. @bennpeifert 's graph is notable for the simple fact that before this year especially, most calls were *sold* to market makers, not bought. This is especially true on indices, but we've seen a shift since 2020. This, because of hedging, forces market makers
to buy a requisite number of shares matching the delta of the options contract they sold, to some matching cadence (it's not instant, but @SqueezeMetrics talks about it in a post I'll link later).
In general, this only can exist as the stock price keeps going up. This is because of @jam_croissant 's best friend, charm (delta decay). If a stock price stagnates for too long, the call contracts start losing delta, which happens exponentially as option expiration approaches.
This is why Tesla and meme stonks tend to jump rather than move in a nice smooth line, and when they 'consolidate' they usually lose significant value (GME lost 20% for instance). We can model this simply as the relationship between hedge outflow delta (charm, vanna, gamma)
and hedge inflow delta (primarily new contracts written, but also gamma as the call squeeze occurs and pushes up delta of existing contracts). The music can continue for a long, long time. As we can see in the graph, the retail investor demographic loves call options.
In general, you need a prolonged sideways period to break the curse, because even in a correction, your max loss on a bought option is -100%. However, this can occur, and will occur given enough time.
The reason for this is simple - a prolonged negative catalyst or regime shift. This can be anything, honestly, and it's hard to tell in retro, but a classic example would be interest rates rising. In that case, we'd anticipate new inflow delta to eventually trickle off.
When it does, near the next major opex (usually weekly on meme stonks), we'd anticipate lots of strange effects. In the beginning, volatility should increase as the charmed hedges start unwinding. As we get close to expiry, charm becomes dominant, and coupled with gamma, we
quickly see the stock price break down. This is also why, similar to NOPE theory, meme stonks are extremely sensitive to both positive and negative perturbation/news (Citron's attack cratered PLTR by 25% in a day).
I'm going to soon try to build a model to match the inflow and outflow data, because it should be elucidating on what's going on when you see these weird and often big names pump by 5, 10, 15% in a day. Will keep y'all posted and let's see when the music stops.

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More from @nope_its_lily

11 Jan
Personally out at 40% gain on 0dte call spread.
As usual, it reverted and also fuck me.
Same call spread is now about 100% up.
Read 4 tweets
11 Dec 20
Thoughts for tomorrow: corona open stocks (hotels, travel, airlines, oil, etc.) will likely get a nice continued pump in the PM, and /RTY should show leadership, but will likely fade as the day goes long (puts at open maybe?). Tech will likely continue to lag, but SPY volatility
should likely be muted, although there's higher chance of the downside not only given the EOD action observed earlier, but also /NQ's weight in the index and potential battering due to sectoral rotation.
It's probably not a great idea to play off the initial pump and buy calls given the gamma pinning action at play + the higher downside risk, but who knows.
Read 4 tweets
9 Dec 20
I'm very bullish right now on food and consumable products, but that's mostly because my stomach is growling.
That said some good stonks - $TSN $JNJ $PG $QSR $MCD maybe
and an old favorite of mine $CLX, but like, it's also shitty liquidity
Read 4 tweets

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