Explaining Option PINS and GAMMA — $GME options

Disclaimer: Not investment advice. For informational purposes only.

This is the clearest video I’ve seen that explains the mechanics of options

OPEX trade. For today’s OPEX (options expiration) day, I have tested an iron condor trade on $GME (sell/buy 210/220 calls and 200/190 puts), of selling premium ATM options on the thesis that $GME stays between 200–210 for opex day.

Why? Two guesses — balanced GAMMA and expected PIN action.

Gamma. Option dealers (which assume are a significant part of options OI) hedge the stock exposure (i.e. delta) of the options they have sold, for example buying stock to hedge calls sold. Dealers buy less stock for more OTM strikes because the probability of the stock getting there is lower.

$GME is special because the IV was so high (still almost 300%) that there are premiums being sold for crazy strikes (i.e. 800) which are likely also hedged.

What many caught wind of that when a stock moves (i.e. such as spiking into previously way OTM ranges), dealers have to hedge (i.e. buy more stock) the “gamma” (increase in delta exposure). That can create explosive moves.

One way to look at a stock is the potential “gamma” to hedge of a stock as the price moves.

The steep declining line means there is a ton of “gamma” to hedge as the stock moves. Note that the super high IV’s of $GME also reflect that risk.

My thinking is that both blue (call gamma) and orange (put gamma) are almost balanced in their steepness which suggests to me the “gamma” is balanced both ways, making it less likely an explosive move will happen Friday (today).

The key “gamma” price is also coincidently $200.

PINS. On OPEX day the “gamma” will collapse to zero — as probability of the stock price moving into OTM option ranges drops as time ticks. So dealers can remove their hedges and premiums of OTM option collapses.

This leads to the “max-pain” idea. If there is no catalyst or significant buy/selling one way, then the removing of hedges pushes the stock to a level where the max amount of options expire out of the money.

This “max pain” price is $150 based on open interest- likely downward skewed because of all the out of the money call options written in $GME.

I am choosing to use the $200 price — as at test of SpotGamma’s model, which uses the largest change in gamma to estimate that $200 is the key price level where volatility will increase from there.

We’ll see.… the iron condor trade should work if gamma is balanced, no catalyst or significant flows emerge, and stock moves to this estimated PIN area.