Savvy Trades and Investments

[CPTMatt]

TSLA - Infinity Call Gamma Squeeze

Reposted from reddit link below
https://www.reddit.com/r/teslainvestorsclub/comments/hkiw0s/tesla_infinity_call_gamma_squeeze/


So I’ve had this hypothesis for a while now, and I’m almost certain it is what’s happening. Obviously I don’t have all the data in front of me and I only have the observed data, but I can infer that essentially Tesla every few months will undergone an “infinity” call gamma squeeze that will keep pumping the stock up. There’s been some talk on Twitter about this if you just like search TSLA gamma, squeeze, etc. so I’m not the only one to observe this.

If you are familiar with the famous Volkswagen squeeze, it’s similar, but the key difference is instead of it being a short term squeeze, this one seems to be a more drawn out squeeze that occurs every few months. So the reason it’s notable is that Tesla holds some interesting characteristics. First, it’s call skew in options sometimes is MUCH HIGHER than its put skew. This is unique. Very rarely do you see companies where the call skew is much higher than it’s put skew. Option demand is usually on the downside for protection for big funds, but in Tesla, the majority of the option buying are OTM, upside calls. Next, Tesla at times can trade option deltas greater than share delta, which means options have a huge weight on price movement. In order to properly hedge options flow delta, a market maker would have to move the stock quite a bit. Furthermore, Tesla has a decent amount of shorts, despite being a successful stock (successful is defined as in the price move). Finally, Tesla has a ton of retail interest and despite being a 1000+ dollar stock, it has a ton of retail call options buying too. These make for a lethal combination to basically squeeze it to “infinity” with little resistance. Anyways, this leads me to what I think what’s happening with Tesla. It’s actually quite simple to understand (more so if you understand terms like delta and gamma).

Here’s what happens. Someone starts by buying way OTM calls > force market makers to buy stock to hedge calls initially, which moves it only a bit up > release some good news > force algos who trade news to buy stock > the original OTM calls are now closer to ATM > due to gamma, market makers have to buy more stock > after seeing the initial move, now retail is piling into calls too due to FOMO > shorts are buying back stock and buying calls to hedge too > causes market makers to now desperately buy more stock to hedge > cycle repeats > stock price goes to infinity.

Obviously this doesn’t work if you don’t have good news to release but Elon always does. This doesn’t work if no retail help you buy more calls, but everyone here will FOMO. Just go to wsb and check out the posts. This doesn’t work if there weren’t so many shorts in Tesla but there always will be who have to manage risk. This doesn’t work if some big find offloads Tesla shares as it goes up, but most are holding, including Elon. This doesn’t work if SPY tanks either due to beta, but SPY just goes up too on average.

And here’s the kicker. Once the calls expire, the stock price won’t drop since it erases all downside gamma. Then you repeat this every few months. This is how you can get a stock easily to infinity actually.

Now who’s the initial call buyers? No idea. It could even be Elon himself or someone related. This is what Porsche did with Volkswagen to cause the squeeze. Porsche loaded up on the calls first and then released their “news” (which was they locked up the float). The way Elon is taunting the shorts and SEC could mean he knows what’s happening too. The thing is, since all the initial person is doing is buying calls, he’s not doing anything bad. It’s not his fault that people then FOMO, market makes them rush to delta hedge, and shorts continue the call buying + share covering. The initial call buys may have started the chain, but the rest is set in motion by everyone else.

Anyways, this means you actually can’t short Tesla. It’s just strictly -EV to do so. I bet you if you take a graph of SPY and Tesla side by side, on almost all days in which Tesla actually dropped, SPY probably dropped that day too. But there were days in which SPY probably barely went up but a Tesla shot up a ton (like today). So if you short Tesla, you would be strictly better off shorting SPY. Shorting Tesla also means paying a much higher IV in put options too and having more upside risk in short shares. The other way a short can win on Tesla is some bad news, but can you really time that greater than the times you keep buying puts?

So yea that’s basically the story of Tesla. This stock can literally go to 2000 with no fundamental change. As long as the call buying keeps happening, this stock will chug along to infinity.

Here’s my post a few months ago talking about this so I’ve been thinking about this for a while: https://www.reddit.com/r/wallstreetbets/comments/g3g63c/tesla_options_activity/fnr3j1d/?context=3

I just wanted to give a more formal post. As I also mentioned, this is just a hypothesis, but there’s a ton of evidence supporting this, and it’s talked about my others too. You can google like TSLA convexity squeeze on YouTube and someone made a video about it. I’m just adding more details to provide color.

Edit: This is just a hypothesis, so nothing set in stone. I can only infer things from the data. My tldr is if you are thinking about shorting Tesla, it's probably not a good relative short vs another name or vs SPY/IWM. I would not recommend buying puts, selling naked calls, or outright shorting stock. That doesn't mean you can't win shorting Tesla, but your EV on the return is probably not as high as other shorts over the Long Run. You need to time it incredibly well, and it's very hard to do. For example, during a SPY selloff, Tesla can drop a lot, but can you time the next SPY selloff? You are also paying a ridiculous IV for the puts, much higher than other names. If you do want to short and really have this urge to do so, pick a specific known event like say the earnings later this month and short it then. For the record, I'm not long Tesla (I am long other big tech though), but I'm merely trying to explain a hypothesis. Also saying "don't buy puts" is not the same as saying "buy calls", so keep they in mind. I'm not advocating to just keep buying calls either with the high IV. But saying "don't buy puts" or "don't short naked calls" is a "trade" in itself since saving money means you can use that on other trades.