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As shares of Trump Media (NASDAQ: DJT) skyrocketed under its new ticker on Tuesday, the traditional media outlets found themselves perplexed by the stock’s sudden 50% surge in value. How could a struggling company in a fierce industry become an almost $10 billion behemoth overnight?
Short sellers, sensing opportunity, have pounced on DJT. Fintel.io data reveals that nearly all available DJT shares have been shorted, with borrowing fees exceeding 210%, ranking it as the costliest U.S. company to short sell.
However, a turn of events may be imminent. In recent weeks, the trading volume of DJT’s call options has soared. On Monday alone, over 60,000 out-of-the-money bullish options changed hands. Despite Trump Media’s uncertain path to profitability, a gamma squeeze could propel shares to $100 or beyond.
Beware, short sellers! Trump Media’s fervent believers and speculative traders could potentially launch the stock to astronomical heights.
The Gamma Squeeze Unveiled
A gamma squeeze occurs when stock prices surge rapidly, compelling options market makers to buy shares to offset their positions. This phenomenon propelled AMC Entertainment to unprecedented highs in 2021 and might be the driving force behind Nvidia’s current surge.
Options market makers aim to rake in commission fees rather than speculate on a stock’s direction. Hence, for each call option sold, these traders typically purchase a corresponding number of shares to hedge their wagers.
The equilibrium is typically maintained, with titans like Apple witnessing hundreds of thousands of option contracts traded daily without a ripple effect on the stock’s value. However, out-of-the-money options have the potential to trigger a self-perpetuating cycle.
Decoding the DJT Example
Consider this concrete scenario: on Monday, Trump Media’s $85 call options traded at $1.40, whereas the $90 call option had a price of $1.10. The $5 price gap necessitated market makers to acquire additional shares as DJT’s value rose, leading to a cascading effect.
The surge in delta, i.e., the rate of change in option prices concerning stock prices, places further pressure on market makers, fueling a spiraling demand loop.
The Influence of the Trump Effect
While deep out-of-the-money bets are seldom profitable, Trump Media has stirred a frenzy. The surge in trading activity surrounding moonshot bets indicates a potential surge in share purchases, setting the stage for a potential “coiled spring” effect.
Valuing Trump Media
In the long run, Trump Media’s worth will likely mirror its profit multiples. While analysts forecast scant profitability for the media firm, its potential user base growth could translate into immense value. The short term is the most intriguing, with Trump Media’s limited tradable shares, setting the stage for volatility.
On the date of publication, Thomas Yeung held no positions in any stock mentioned in this piece. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
