WTF is going on at SuperMicro? (SMCI)
Anatomy of a gamma squeeze.
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I want to talk about Supermicro. The stock has gone parabolic; some say it’s emblematic of the coming Semiconductor and AI bubble. I think it is to a certain extent, but I want to point out a particular aspect that has been happening. Given the high volume of options expiring today, I believe there is an ongoing gamma squeeze. It created huge buying pressure that has led to today. This was the run-up until Thursday.
For more information on a Gamma squeeze, refer to that link. I don’t know precisely what kicked it off. Maybe it was the insider purchases near all-time highs, the continued AI hype, or the Russell 2000 overweight problem1, but there became a quick and sustained demand for shares, which created a problem for call sellers.
Usually, it’s a relatively orderly process on options' expiration day, given that the vast majority of calls and puts expire worthlessly. But when shares go up quickly for calls, and the vast majority of calls are in the money, the call sellers usually want to hedge their notional exposure by buying the underlying so they will not be caught without shares on the option expiry.
What’s more, there are a lot of options that are open for the expiration day on February 16th (today). I think that the gamma squeeze probably peaks today. Given the recent price run, most calls are in the money.
And how big of a demand this could be is stark. Assuming it is ~100k of in-the-money calls, that is ~100k x 100 x 900 = ~$9 billion of shares that need to be accounted for. You can see the result of that demand for shares in average volume in the chart below.
There will be some share buying next week, but probably not quite this level. Now, I think that SMCI will finally be able to rest for a bit. Notice the volume ramp that has recently happened; I think that is indicative of the gamma squeeze.
And now one of the most overbought stocks on the planet (it technically hit 100 this morning) can rest. It’s time for SMCI to go down and for the gamma squeeze to end. I like SMCI fundamentally, but stocks cannot go to infinity, and I think the big driver that has helped SMCI fly is over.
Given today’s price action, I think the expiration date will catalyze SMCI to return to the land of normal. If share prices go down, then the negative reinforcement of prices going down should start to take hold. If shares are choppy into next Friday’s expiration, it would confirm that the squeeze is over.
That’s it for today. It’s a very brief write-up, but I’ve seen so many insane things on SMCI that I just had to put my two cents as to what is going on. Markets are fun because of this exact thing, and the recursive nature can occasionally break stocks. SMCI is a great example of the upside. This is not paywalled because fuck it, it’s funny, and everyone should know about what a gamma squeeze is.
So far it’s accounted for over 50% of the Russell 2000’s performance year to date, and to be underweight it as an active manager means that you’re going to have some hard conversations about performance.
Nice call!
Great explanation. It's been a wild ride!