Market makers now had to buy Tesla shares to unwind their delta hedges, which grew substantially larger as options were much deeper in-the-money now.Ĭoupled together with the classical speculative call buying, we get a gamma squeeze: When Tesla exploded to $1,000, investors started to close these shorts, and they bought back the calls from market makers. They need to delta hedge it by selling $TSLA shares. Initially, when an investor sells a $TSLA call option, say a $750 strike, a market maker on the other side is long that call. It was almost like a call options short squeeze - the higher the call price, the more investors closed their short calls, driving the price higher in a self-reinforcing cycle.Īnd this is where the delicate dynamics of options comes into play. This is clearly visible in Tesla's implied volatility, which came down significantly ever since joining the $SPX in December 2020. It joined a respectable equity index, had a stock split and began doing all these things that typical adult stocks do. It was no longer this carefree and fun stock to have. And this time, it's not you - it's them.īy the end of 2020, Telsa has changed. Remember how your relationship with Tesla stock started? You were both young and had a great time together.īut then - as usually happens with relationships - one of you grew up. I'm talking about price-insensitive buying, forced selling and other joys of non-discretionary trading.īut before we dig into them, let's take a short trip down memory lane. ![]() Although, nothing's stopping you from drawing a double wedge on a $TSLA chart. When fundamentals don't matter, what do we turn to?
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