The Short Gamma Cornering
There is a good probability for directional trends in Day trading Tech leaders in the following weeks. An example for that can be seen in Fridays day trading pattern.
The reason for that is an enormous derivatives position that was taken by SoftBank according to some publications, which bought options on tech leaders for a premium of billions of dollars, which represent an underlying exposure of tens of billions on these stocks.
The market makers and the banks that sold these calls had to cover their Delta exposure as the market kept going up, and this is why we saw these big 10% jumps in the Tech leaders last week. As the trend reversed, they had to sell back the Delta exposure, thus creating Thursday and Friday crash.
When you are short Gamma (Sold options), you want the market to stay in the same place so you can earn Theta each day, and also waiting for the volatility to go down , so you can profit from the Vega.
Your worst nightmare is that the market will move fast, and then you need to balance your Delta, every certain move, and hope that the Theta that you earn will cover the losses from that activity. You sell as the market go down and buy as the market goes up. This is a sure loss when the market moves fast and with big moves.
Since the options volatility is up, you can only close your short Gamma position buy taking a big loss, so you hope that things will calm down, but because many traders are in this horrible position, obviously it won't be that easy.
I talked about these situation in a post I did on March 3rd, after we saw the same pattern when the banks that sold Gamma to Bridgewater which accelerated the March market crash.
So, until the options sellers could reduce their Gamma exposure, we can expect, very directional accelerated moves in these Tech leaders, which is great for Day trading.
Ride the daily trends...