The Two Stocks With The Best Gamma Squeeze Potential For The Rest Of This Week

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The two stocks that I think are ripe for a gamma squeeze are Gores Guggenheim, Inc. (GGPI) a.k.a. the "Polestar SPAC" and Cassava Sciences, Inc. (SAVA). I believe that they are going to squeeze for very different reasons, but squeeze nonetheless. 

First off GGPI. GGPI is in the right industry as it will be merging with Polestar, an electric vehicle company that is further along than recent IPOs like SEV, RIVN, LCID and FSR. Despite that, at GGPI at $15, Polestar's $30 billion post-merger valuation is less than half of most of these companies. A blog post on Seeking Alpha with a target of $35 puts forth a straightforward fundamental argument for going long GGPI: 

CCIV, the former SPAC shell for LCID, ran from $10 to $63 in a little over a month in January, and started off eerily similarly to how GGPI is trading now:

CCIV was considered overvalued at the time and did crash post-merger, but LCID has since come roaring back to challenge the highs it made as CCIV. This is a blueprint for GGPI, with $35 being a decent target based on effective valuation as well as float as GGPI has 80 million shares outstanding. 

But the gamma squeeze potential is what needs to be addressed here for the short term gains I expect over the next couple of days. The funds have been trying hard to keep GGPI under $15, and for good reason. This is a screen shot of the call options outstanding for November's expiry:

Each strike price above $10 has tens of thousands of options outstanding. A couple of weeks ago when many of those options were written, the $10's were expected to be slightly in-the-money while the $12.50's out-of-the-money. Both of these options will be deeply in the money. They combine for 37,408 contracts, representing 3.74 million shares that must be presented to call option holders.

Two questions will come up to debate this. 

1. The retail option holders will likely sell their options in order to avoid taking possession of the stock and running into margin issues. 

Yes and no. When you look at the volume compared to the open interest, only a small percentage of in-the-money call option holders are closing off their trades. There are only two trading days left before expiry and with that small volume relative to the open interest, I don't expect that open interest to decrease. Plus the call option seller isn't necessarily selling back to a call option writer. It could be a third party who is buying the option and wants to take possession of the stock instead of buying on the open market for whatever reason, and the call option writer is still obligated to sell the shares to them. 

2. The volume of shares that this represents is still only a small part of the trading volume, so it should be easily absorbed. 

This is an issue with high frequency and bot trading. The 80 million share float has flipped over three times in the last four days. This is highly indicative of HFT traders selling to each other repeatedly in order to spoof the volume and make it look like the covering of any shorts or presentation of any shares from option writing is no big deal. Two firms could sell 100,000 shares back and forth to each other in mirrored bot programs dozens of times a day. The 3.74 million shares that must be presented in a real transaction that has to take place. It's 5% of the float which is pretty significant and can cause a gamma run that can't be hidden behind large volume. In fact, large volume only hurts them as large volume and increasing share price is a very bullish signal for retail traders. 

The $15 strikes and higher are where the option writers can come into a world of hurt. And this is why they have been working so hard to keep the $15 resistance. An additional 20,884 in open interest, representing over 2 million shares would need to be presented to option holders if GGPI lands over $15. There's an additional 3 million shares worth at the three price intervals above $15 up to $22.5. If this was to run, it would be similar to what we have seen on IONQ in the last couple of days. IONQ wasn't looking too hopeful immediately after its earning report when it was trading in the $18's after hours. That was the market makers trying and failing to keep a lid on that stock price at $20. IONQ's $20 is GGPI's $15. If GGPI breaks $15, it's off to the races. Especially since the same funds tend to work across multiple SPACs. So if they are hurting on IONQ, they are more vulnerable on GGPI. 

Next, SAVA. This one is very different in that it already had a squeeze but then shorters took it down. SAVA disclosed in a recent filing that government agencies are investigating the company, without any implications of any wrong doing. The shorters then had their pals at the Wall Street Journal pick up the already disclosed "scoop" to tank the stock some more. At 9am the article came out and tanked the stock about $10 on very little volume. The stock didn't recover and spent the day in the mid-$40's to mid-$50's. This is textbook manipulation and it's to let the heavy shorts who were badly burned and very wrong in the previous two weeks, out with minimal losses. Volume was greater today than the last few days, but was only a small percentage of the volume that occurred in early November when SAVA squeezed. 

Short interest is a very heavy 30% and if the shorts are smart, they will cover while the covering is good. This is where a gamma squeeze effect could occur, with $50 being the key level as the bulk of the option activity occurred at this level. This implies max pain at $50, but if short covering brings it beyond that level,  those calls expire in the money while the puts expire worthless. That will force the hand of call option writers to present longs with the stock. 

 

This analysis isn't nearly as in depth as GGPI, but I don't think it needs to be. This was some dirty trickery by the shorts to try to get out of their positions with minimal losses, and getting out is likely their course of action for the majority of them. Retail traders are within their power to make life more difficult for them.