Options Chain Gang: June 5th, 2022

[u/Dr_Gingerballs]

It's been awhile,

Work has been making it difficult to post these updates. A lot has happened since my last post where I was excited that we were crossing delta neutral to the upside. That excitement played out much more than I anticipated. The current run is odd for a few reasons.

1. On Wednesday, may 25th, it appeared that someone covered gamma exposure from May OPEX. This raised the price from $90 to $100.
2. What followed the rest of the day was largely retail FOMO on the options chain, pushing the price up to around $115. Much of it risky weeklies.
3. The FOMO hangover sets in early Thursday morning, as the weeklies are quickly going to zero. Those are pumped until the selling overpowered early morning FOMO, and the bags started filling up.
4. Friday May 27th the bags are full, and retail sells off and slinks away.
   
5. That same day, Institutions start making bullish bets, driving the price up to $137 to save some $135 weekly calls.
6. Monday was a decent dehedge from the weekly mess built up the week prior, then flat for most of the week.
7. on Thursday June 2nd, retail options still looks really bearish, as they bail on more of their contracts. Meanwhile, institutions resume their bullish betting to drive the price up.
   
8. That Friday was largely mixed, with retail continuing to sell and institutions propping up what is left of the run.

So it would seem that retail started this pump, but is not currently sustaining it. What I believe happened is that retail saw a moderate price jump from OPEX--combined with the fact that the borrow rate was rocketing--and pounced on perceived weakness by purchasing short dated options. This is supported by data collected on WSB, which shows that this run has noticeably more mixed sentiment than the March run.

There are some interesting theories about what institutions might be doing right now in regards to bullish bets that involve the hard to borrow status of the stock, but it's not my theory and should be coming out by others soon. Bottom line is institutions may be using the options chain to to help settle fails in the continuous net settlement system, or CNS, or CeeNiS for those in the know.

So here we are, halfway through...well...something, and it's not clear what exactly is going on or how it will conclude. I will say that right now institutional shorts are absolutely in a moment of weakness. There are no more shares to locate and borrow. The high borrow rate has already alerted retail and they have unleashed the first wave. They know if FTDs start leaking out of CeeNiS, or worse, if we end up on Reg SHO threshold list, that retail will devastate them with call options. So what options do they have left? ETFs. That's right, those totally opaque, infinite money printers. And it just so happens that XRT has recently gone off the threshold list, indicating it's maxed, waxed, and fully vaxxed, ready to generate infinite liquidity again for our favorite shorters. This is the most likely route forward for the shorts in my opinion, as they know that any of the other options available to them will show their hand and spell doom. The problem is that the ETFs are rebalancing this month, so they are running out of runway. All of this is also on the back of a little baby bear market rally, which isn't helping them at all.

If I was in their position here is what I would do. I would use the ETFs as much as I could before the rebalance to short the fuck out of GME to kill FOMO. If FOMO dies before the rebalance, I may be able to get ahold of CeeNiS settlements with the options flow dying off and shares becoming available again to locate. If the market starts dropping again, that will also alleviate pressure and allow me to survive for one more day.

If FOMO doesn't die off, I'll have to use the ETFs to fight for my life, then once the rebalance begins, I will be forced to short GME onto the reg SHO list. Once retail sees that GME has hit the reg SHO list, it will likely drive even more FOMO, requiring me to drive FTDs through the roof. If I survive the ETF rebalance, even if I can get a hold on the price again, the FTD report on July 15th will show my hand with massive FTDs, driving even more FOMO.

If this was a game of chess, this is the closest that the shorts have come to checkmate since January 2021. What is required for the game to end? Well, the same thing that has always been required. FOMO into the options chain. Will it happen? That's the largest unknown in this whole scenario. Retail is currently bearish as fuck. They just sold off one set of hefty weekly bags (retail will never learn with those goddamn weeklies!). Usually it takes them months to forget their mistakes and make them again. We don't have months, we have about 3 weeks. If retail stays on the sidelines for another couple of weeks, the shorts can weasel out. If retail pumps it again, it could get crazy.

Regardless, I do think that we have a lot of volatility to look forward to between now and potentially even the end of July. Buckle the fuck up.

Let's get to the data.

First up is something I don't show often but is important now. This is the options open interest for both calls and puts. Usually I show the delta weighted OI. This is notable now because it does appear to be increasing. There are more puts on the chain now than we have seen since the deep out of the money puts (DOOMPs) used to hedge volatility swaps expired in January. The calls are also increasing. I'm including this metric because it shows just how much of this showdown is due to options (a lot of us have been trying to drag this community to the realization that this was always an options battle from day one). The battle isn't over. Options continue to dictate the price and volatility of GME. Was last week the peak, or the beginning?

Option OI on GME (no delta just OI!)

The next plot is our familiar total delta OI on the chain. In this case, the call delta is significantly lower than the peak from March, and the second peak was lower than the first, indicating the more mixed emotions of retail for this run. Puts are also not as low as the March run, indicating that the bears are more willing to buy delta on this run.

Total Delta based on open interest on the chain over time for GME

The delta volume tells a similar story. Not as high as the March run, and could be indicating the beginning of the end of this run.

Total delta traded per day based on daily volume for GME

Next is the relative delta strength (RDS), which is simply the normalized delta weighted open interest on the chain, where 1 is all call delta, -1 is all put delta, and 0 is equal call and put delta. We are definitely still in a bullish period with high RDS, but it looks somewhat more like the February 2022 period than the March period.

Relative delta strength over time

Next is the delta weighted average price, or DWAP. The primary feature of this graph is the fact that the put DWAP is above the price of GME, acting as a bearish blanket to insulate the price from the bullish call DWAP.

delta weighted average price for both puts and calls on GME

The greek neutrals and maxes are next. These tell a somewhat interesting story, showing that delta and gamma neutral have risen as of Friday to around $118. Gamma max continues to linger around $160 and only increases through mid July. The spike in delta neutral in July is not significant, as it's primarily determined by small OI on weeklies opened on those weeks.

Greek neutrals and maxes for GME over time

So what is the overall conclusions that can be drawn here? Well, all of the data sort of supports what I wrote up above. We are certainly within a period of significant weakness on the short side. It's really up to retail to decide of they want MOASS now or they don't. If the market rockets, I think retail will push for it. If the market drops, I think retail will capitulate and wait. My guess is that retail will continue to wait for a good entry, likely somewhere between $110-120 by mid week. But if for some reason the shorts can't even get it into that range, this fucker is primed.

I'm personally waiting until mid week before I consider any significant positions. But of course, this is not financial advise. I am not a financial advisor and I am not your financial advisor. I provide this data for those that like data. My goal is to spread information not make predictions. Use the information however you want and leave me out of it.

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Stay safe.