Transcript: The gamma squeeze
This is an audio transcript of the Unhedged podcast episode: ‘The gamma squeeze’
Katie Martin
Sometimes it feels like the only stock that matters in the whole world is the mighty Nvidia. It’s really important to understand what makes this stock go up and down and why. And there’s been some funny business going on recently particularly in the form of — scary voice here — a gamma squeeze.
Options markets are basically making a crazy hypey stock act even more hypey. So today on the show we’re gonna be asking, is hypey even a word and, more importantly, what’s going on with this options/stock market feedback loop? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I’m Katie Martin, a markets columnist at the Financial Times in London, and I’m joined today for the very first time by the very lovely George Steer, who is a markets reporter here also in London, but fresh from a stint in New York. George, which is better, New York or London?
George Steer
Good question. Gonna say New York, sorry. (Laughter)
Katie Martin
What? You’re fired. OK.
George Steer
More expensive, but yeah.
Katie Martin
Controversial stuff there. OK. So give us a sense, right? Like I say, you’re just back from the Big Apple and Nvidia is the only stock that anybody can talk about. Just how big of a talking point is this among professional fund managers now? I can’t move for people talking about Nvidia.
George Steer
It’s become Wall Street’s darling stock for sure. It’s up something like 150 per cent since the start of the year. It’s quintupled, or more than quintupled, since the start of 2023. It’s responsible for something like a third of the S&P 500’s gains this year alone. And it’s incredibly volatile. So a lot of people can make a lot of money betting on it every single day. It’s all everyone’s talking about.
Katie Martin
I mean, it’s mad, isn’t it? And like, obviously it’s part of this big AI chips kind of boom. But just the size of this company is nuts, right? So it’s bigger than JPMorgan plus Berkshire Hathaway plus Meta combined. Am I right in that?
George Steer
Yep. Yesterday I think it was valued at just over $3tn. So for a moment at least, it became more valuable than Apple. Just behind Microsoft in second place.
Katie Martin
This thing has legs. So look, one of the reasons why this stock is up so massively is because the company’s doing all sorts of well at the moment. Like every time it puts earnings numbers, it’s like, oh, that number that you had in mind, you know, double it. Like they just cannot stop making money at the moment. What sort of scale are we talking about?
George Steer
I think its first quarter results, which it announced last month, revenues were up 262 per cent or something like that. I was speaking to an analyst the other day who said he’s never come across a company that has so consistently beaten and raised, beaten and raised, beaten and raised. Yeah, it’s unstoppable. And anyone who kind of questions whether it’s overvalued, one easy response to that is that now it’s making a lot of money doing what it’s doing.
Katie Martin
But that’s the thing. Like the stock is up a lot, but it’s not up as much as the revenue. So there’s a decent argument, crazy as it sounds, that this thing is actually undervalued.
George Steer
Yeah, it’s valued at just over 40 times earnings for the next 12 months, which isn’t crazy and is below where it was valued a year ago during the first kind of AI hype wave. So it’s expensive but not stupidly so.
Katie Martin
So on top of that, you do have some slightly funny business going on with this stock, right, which you were writing about the other day. And the sort of fancy-pants clever word for this is a gamma squeeze, which makes it all sound like super, super clever. Break it down for us a bit. This all relates to the options market, right?
George Steer
Yeah. So Nvidia has a huge, huge options market, options being kind of little derivative bets that you can make on the direction of its share price.
Katie Martin
So if you’re an investor you can say I think this thing’s going up. I’m not gonna buy the stock itself, but I’m gonna buy a little contract that will pay me money if the stock goes up, which is kind of, you know, the same bet. It’s still a bet on Nvidia, but it is just a little bit different.
George Steer
It’s cheaper and it provides more leverage. So you can see the appeal. Yeah. People have been buying a hell of a lot of call options on Nvidia betting that the share price will rise. So in buying these call options, the market makers on the other side of the trade.
Katie Martin
So banks to you and me, right?
George Steer
Yeah. They don’t want to take a punt on the direction of the stock in case they’re wrong. So to hedge their position when they’re selling these call options, they have to buy the underlying stock. They have to buy shares in Nvidia. So that drives the share price rise up. And it kind of kicks off this kind of feedback loop, yeah, the self-fulfilling cycle of ever rising prices. And that’s known as a gamma squeeze in the jargon.
Katie Martin
Yeah. And it makes you sound clever on the chat boards if you talk about it as a gamma squeeze. So this is not a new phenomenon, right, but it just tends to grab headlines and become something that people start kind of raising their eyebrows at when it becomes really concentrated. So there was a slight element, possibly, of gamma squeezing that went on back in 2021 when GameStop first went totally loco.
And then I remember writing about it in 2020 when, we reported that SoftBank, big kind of Japanese kind of venture capital-y, private equity-type conglomerate, was buying so many options on the Nasdaq, betting that the Nasdaq stocks index would go up, that again, a similar thing was happening. So banks were having to buy more exposure to the Nasdaq to try and hedge out what was going on from the purchases of these options. And so it just kind of became an unstoppable wave of buying that came from all directions. So what are people saying to you about how big of a component in Nvidia’s recent stock moves is accounted for by this?
George Steer
It’s hard to to attribute X amount of the rally to the gamma squeeze. It’s even harder to do so because Nvidia is such an attractive company. A lot of people are just buying the stock because they think the stock is great. So it’s hard to kind of quantify how much the gamma squeeze is pushing the price up. But it’s definitely happening. And you can understand why it’s happening because people want to buy these cool options because they’re so sure that the stock is going to keep rising. Nvidia has become a kind of perfect momentum stock. People buy it anticipating that it will keep rising. And it’s worked so far.
Katie Martin
I’ve been around the block a few more times than you, George. This sounds bad to me. Like a thing going up because everyone else thinks it’s gonna go up. It’s a bit like crypto-y. It’s a bit like just pure momentum. Like, is this dangerous? What are investors saying to you about that?
George Steer
I guess it becomes dangerous once one of Nvidia’s customers, one of the other Magnificent Seven companies starts slowing purchases of various chips. Or Nvidia at some point will have to say, well, its growth will have to slow at some point surely. Investor expectations are so high that if it disappoints even a little, that could knock the rally and the gamma squeeze could unravel. And because Nvidia makes up such a huge chunk of the broader S&P 500 index, if Nvidia wobbles, the entire index will too.
Katie Martin
But do you think people are betting that the wobble would come from Nvidia as a company rather than from what’s going on in the options market? I mean, certainly what fund managers say to me is, look, we love Nvidia. You cannot argue with these numbers, but we don’t really understand whether this company has what investors call a moat, right? Is there a moat around this company. Does it have absolute dominance over the competition or is there another Nvidia somewhere down the road that come along and take half of its market share? I don’t know, I mean, and no one else knows either. And also, I guess you’ve got this kind of geopolitically, kind of electiony element going on here whereby who’s to say what China is doing on the chips front? Who’s to say whether Nvidia is gonna continue to be able to sell its products around the world? How contingent is it on all of the supply chains that China controls, you know, with the kind of US elections coming up? There’s a bunch of things that could go wrong for Nvidia, but right now they are very much not going wrong.
George Steer
Yeah, they’re in a real sweet spot, that’s for sure. But they’ve been in the sweet spot for a while now. Again, like since the start of 2023 it’s just been up, up, up, up, up. And I think historically investors have been inclined not to kind of price in bad news or expect bad news with stocks like this. So yeah, there’s definitely a chance that when something does go slightly wrong, it doesn’t have to go wrong. Growth just has to slow.
Katie Martin
It can just, yeah.
George Steer
Things just might have to slow down a bit and we’ll see how investors react. Yeah.
Katie Martin
Yeah. But on the, you know, going back to options this is like not quite as simple as just buying stocks. But it’s almost as simple as buying stocks, right? It’s become a really mainstreamy, retaily kind of way to get exposure to stock markets. Like why are options so hot right now and what’s going on in that space?
George Steer
Zero-day options are kind of so hot right now, yeah, as you put it. (Laughter) There are options contracts that expire on the day that you buy them. So they allow you to take really short-term punts on the direction . . .
Katie Martin
’Cause normally you say I think this stock is gonna do X over a one- or three- or six-month period, right? These things are like, no, that’s far too long. Let’s just bet on what it’s gonna do today.
George Steer
Exactly.
Katie Martin
This has exploded right?
George Steer
Yeah. And you can kind of see why because if you look back at Nvidia’s results, say, whenever they announce results, the share price tends to move a lot. So ahead of its May earnings results, if it makes sense to put a zero-day option bet on the fact that Nvidia might shoot up as it did. And it’s a cheap way of doing so. So you can see why investors like these things.
Katie Martin
So that’s why that gamma squeezy phenomenon really caught on on the day when it put its results out. There were just so many people betting this thing was gonna go up.
George Steer
I think the options market was pricing in something like an 8.5 per cent move, which is, for Nvidia, quite a small move. I think it jumped by about 24 per cent last year after one of its quarterly earnings results. So if anything, yeah, there was that the option market was slightly tempered this time around.
Katie Martin
But we’re talking serious money here, right? So the rally on the day what was it, something like $360bn? I mean this is ridiculous.
George Steer
Yeah. I mean it’s worth $3tn now. So even a 1 per cent move adds a lot of cash.
Katie Martin
Yeah. So normally, like I think most fund managers would rather not spend too much time thinking about just one stock. But this thing is now so big that even like a little bit of kind of, you know, speculative bets through the options market, a little bit of gamma hedging, a little bit of that sort of squeezing can make it like ridiculously make a difference the entire market.
George Steer
Yeah. If you hadn’t invested in Nvidia at the start of ‘23 till now, you would have missed out on a lot of gains, a lot of gains. And you might ask if you’re giving cash to a fund manager and they haven’t invested Nvidia, what the hell are they doing? Because it’s making a lot of money. Yeah. It’s impossible not to pay attention.
Katie Martin
Yeah. What’s your bet here? If it all does go horribly wrong, will people be able to point a finger of blame at the options market, or will it be just, this is the company?
George Steer
I don’t think you could blame the options market if Nvidia suddenly sold off on some bad news. I think the options market is a part of the broader stock ecosystem. It’s just one way in which people can bet on the direction of a company. So I think if Nvidia were to sell off massively, the people that you could blame would be investors who overhyped it in the first place, got carried away to begin with.
Katie Martin
And then we will be very rude about them on this very podcast right here. But until that happens, I mean, listeners, keep an eye on weird comings and goings in the options market. George, we’re gonna be back in a sec with Long/Short.
George Steer
I don’t really know how Long/Short works.
Katie Martin
Well, you’re gonna find out. OK, now it’s time for Long/Short. George, you haven’t done this before. Bear with me. It’s your opportunity to go long a thing you love, short a thing you hate. It can be something off the telly. It can be a sport. You can be long or short of anything.
George Steer
Sure.
Katie Martin
So, what is it?
George Steer
I have to come up with something. (Laughter) Well, that was news this week about this new Texas stock exchange. No one really knows why we need another stock exchange. There are dozens in the US already, so I’ll short that. Yeah.
Katie Martin
So I mean, it is quite a weird one, this one. It’s like a piece of news that kind of dropped out of the sky and left everyone going, Did I dream this? But the deal is, so there’s some real kind of Wall Street heavy hitters here, including BlackRock and, Citadel Securities. And they’re partly at least behind a project to launch this new exchange in Texas. Now, the thing is, we’ve got perfectly well-functioning exchanges already in the form of like, you know, the New York Stock Exchange.
George Steer
Although they did glitch this week.
Katie Martin
Well, they did glitch. But does the world need another listing venue for the US? Why would you list on this thing and not on one of the existing exchanges?
George Steer
I guess the weather is better in Texas.
Katie Martin
Good point. Nice hats.
George Steer
Nice hats. Good music scene, apparently.
Katie Martin
Yes. But is the deal — and look, we don’t know the full kind of contours of this thing yet, but is the deal there will be like looser listing requirements and lighter regulation than if you list on the other places?
George Steer
You think that that’s how they would have to incentivise companies coming over there. Why else would they go? But the restrictions and the listing requirements on certain sections of other US stock exchanges are already quite loose, so . . .
Katie Martin
Yeah, and the rules that are there are there for a reason.
George Steer
Yes.
Katie Martin
So you’re short.
George Steer
I’ll short. I’ll take a short.
Katie Martin
Cool. So I’m gonna be long something. I’m gonna be long European Central Bank: pulled off a trick today. It cut interest rates, which is kind of in and of itself, not that remarkable, but it’s the first time it’s done this in about five years. And also, it’s cutting rates without the cover of the Federal Reserve so in the US, rates are staying steady.
The ECB is cutting. It’s very weird to have this kind of disjointed move in rates. So the danger was that they could muck this up, right, and that they could say we’re cutting rates and leave the market thinking, OK, they’re gonna keep cutting, and this is going to be in the first in a series of loads of cuts. And that could have been quite destabilising for markets, could have hit the euro, for example.
But they seem to have trodden a nice line here. They seem to have reassured the markets not that we’re one and done. There might be more cuts ahead, but we’re gonna like, look at the data. So they’ve managed to kind of pull off this trick, very unusual manoeuvre from the ECB but without destabilising markets. So I am long the ECB.
George Steer
The move this week was pretty well, incredibly well telegraphed. It would have been a huge shock had they not cut. And Lagarde has been criticised in the past for . . .
Katie Martin
So, ECB president, right. Christine Lagarde.
George Steer
Sorry, yeah. Has been criticised in the past for her flimsy communication. That’s harsh but . . .
Katie Martin
But people are harsh about her.
George Steer
Yeah, people are harsh about her and unfairly so, perhaps. Yeah. The lack of a market reaction today, I guess, speaks to how well Lagarde and the ECB prepared markets for the move.
Katie Martin
Yeah. OK, we can both be long ECB.
George Steer
Sure. Sure.
Katie Martin
George, it’s been a pleasure. We’re gonna let you come back.
George Steer
Please do.
Katie Martin
Yeah. (Laughter) Listeners, we will be back in your feed on Tuesday not with George but with someone else. But we will get George back. Don’t worry, don’t worry. So tune in then.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Katie Martin. Thanks for listening.
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