BBIG and ATVI: Major Gamma Squeeze Potential Heading Into Tomorrow

BBIG has been on fire as former AMC apes who have sold at a loss make their money back on BBIG. We have noticed a major shift in social media sentiment as people get frustrated on AMC. Even popular YouTube retail trader Trey's Trades is becoming more bullish on BBIG versus AMC on Twitter. Notice the very careful and coded language here, being careful not to trash AMC but making it obvious that he is cheering for BBIG much more than AMC right now. Notice how he is warning people about options on AMC AFTER they already lost money buying calls at strike prices that expired out of money, but cheering for BBIG calls to destroy market makers:

The AMC ape movement is greatly harmed as some of the AMC retail traders sell then immediately put out negative or trolling messages. Those who are still holding the stock are aggressively putting out Twitter hashtags, but responders are trolling them. The longs then respond back with accusations of bots, when it's clear going by past tweets that they were former shareholders who got angry at the CEO Adam Aron selling shares which has contributed to the sell off. The point is that retail traders cannot team up to fight the market makers and hedge funds when they are too busy fighting among themselves. Are hedge funds adding fuel to the fire with fake accounts? Probably. But not all of the accounts can be fake. 

In contrast, the BBIG movement is new and the community is united. It's not even allowed on Wallstreetbets yet because its market cap is below $1 billion, but other Reddit boards like Shortsqueeze is filled with BBIG-focused content. 

The other major advantage of the BBIG movement is that this is catching market makers off-guard, which is what Trey is alluding to in his Tweets. Market makers have had plenty of time to adjust to the initial short squeeze on AMC to $70 and have been collecting profits on shorts and writing of call options that expired worthless since. They are now well prepared for a short squeeze and have banked a lot of profits on expired call options.  Imagine a football game where the underdogs get a lead, but at half time the coach makes adjustments and strengthens his play calls so that the weaknesses that the underdog have been exploiting are now patched up. AMC is at that point. BBIG is still in the first few minutes of the first quarter.

BBIG pulled back from $5's to $4's which is a perfect entry spot for a second run. Taking a look at the options expiring tomorrow and we see the possibility of a major run:

There is a total of 58,047 of open interest on call options with strike prices at $4 or less that are reasonably expected to expire in the money. That represents 5.8 million shares locked up in delta neutral strategies. But there is an additional 136,611 open interest on calls at the $4.50 and $5.00 strikes. If those land in the money, that's an additional 13.6 million shares locked in delta neutral hedging strategies. Between $5.50 and $10.00, there is 256,415 in open interest, potentially representing 25.6 million shares. 

Keep in mind, this is just for the options expiring tomorrow. There is a lot of open interest at multiple price points for next week and the weeks that follow. There is 32,179 in open interest on call options at strikes up to and including $5.00 expiring next week and 51,134 of the same expiring throughout February. 

The major pushback from the gamma squeeze analysis is that retail traders who are buying call options will just end up selling them to close the position instead of exercising them. Ignoring the fact that for every call option win, there is a call option writer who lost an equal amount of money - usually the market makers who have to take that loss in some form - BBIG is a low priced stock. For a stock like GME, exercising a $100 strike call might take up too much cash for a retail trader to handle. But on BBIG we are talking about a stock that trades in the $4 to $5 range. Exercising options at low strikes can be done in much greater proportion. This creates a problem for market makers that doesn't happen as often on higher strikes.  

There are 136 million shares outstanding and 123 million in the float. This type of call option to float ratio plus the heavy short interest is what caused GME to blast off.  BBIG is in a similar spot. Here is the Ortex data on BBIG:

The latest data shows 34.5 million in short interest, representing 28% of the float. Not only is that far higher than both GME and AMC right now, the option data is through the roof compared to those two stocks. Here is a chart summarizing the short interest plus the shares potentially locked up in delta neutral hedging strategies of each call option category:

A total of 88 million shares are locked in as potential buy volume/holds in the form of covering shorts or options hedging strategies. That represents 71% of the float. Even when excluding the options that expire at $5.50 or above tomorrow, that's still 50% of the float. This is why if just a small portion of AMC shareholders flipped to BBIG, they could easily make their money back and then some on BBIG. 

Let's assume retail owns 400 million shares of AMC. At $19, that's $7.6 billion worth of buying power. If 10% of that, or $760 million, was dedicated to buying BBIG - let's say 76 million shares at an average of $10 - all options would expire in the money. The gamma squeeze would be enacted and 34.5 million in short interest would be forced to cover:

76 million shares bought by retail

34.5 million share covered by shorts

256,000 deep OTM calls actually expire in the money, forcing the purchase of 25.6 million shares = 

136.1 million shares > 123.4 million float = infinite gamma squeeze similar to GME

While the focus should be on BBIG, there is one other stock that is set for a squeeze. This is ATVI. ATVI was trading at $65 before MSFT announced it will buy it out in pure cash deal at $95 per share. Notwithstanding the obvious arbitrage win here, shorts have been particularly loud on this deal, saying that there is no way it could go through, breaking anti-trust laws. The major flaw in this argument stems from the fact that Microsoft is a legal expert at dodging anti-trust issues. So if the company thinks it can get it done, it'll get it done. 

The REAL issue is that shorts and call option writers are in major trouble here and are looking for an exit. There are 10.8 million shares short. The float on ATVI is 773 million. So in that context, it's not a short squeeze candidate. But in the context that those shares are subject to a $95 cash offer and the vast, vast majority of them won't be selling at a 14% discount to that cash offer, it's a much bigger issue. Plus even if the deal didn't go through, ATVI shareholders now know that one of the world's leading technology companies thinks it's worth $95. The deal falling through shouldn't be bearish, but bullish and ATVI could very well trade higher than $95 in that scenario. So shorts need to get out sooner rather than later. And that could come as soon as tomorrow. 

ATVI call option writers fell into a major problem. Every single call option between $65 and $81 strikes that were supposed to expiry worthless or very little this week will now be deeply in the money:

That is 79,513 of call option open interest that call option writers will be have present shares on or otherwise close the trade at a substantial loss. This represents 7.9 million shares. In addition, there is 38,704 in open interest on strikes up to and including $85, representing another 3.9 million shares. Again, this isn't big relative to the float, except that the float is a lot tighter with the $95 cash offer looming. Look carefully for a squeeze from short covering and options expiry winddown between now and the end of Friday. 

Disclosure: Long BBIG and ATVI