I lost $82,000 in 17 minutes when I was 22

In 1998, I lost $82,000 in 17 minutes on Qualcomm.

I was 22 years old, sitting on the market-making desk, naked short calls. The stock started moving. I turned to hedge and the thing was already up $10. I said out loud, "I'll wait for it to back off." Before I could do anything, it was up $50.

It's 100% my fault. I knew that then. Still know it now.

I had to walk upstairs and explain myself. Twenty-two years old, convinced every mistake meant I was getting fired. I had to wear Depends that day. 

The guys upstairs were pissed about the loss, but not really pissed at me. "You handled it right. You got out. Could've been a hell of a lot worse."

That was my gamma squeeze education. One session, 17 minutes, $82,000.

I'm thinking about that morning a lot right now, because Qualcomm just did it again. 

The stock bottomed near $124 on April 7. Five weeks later it printed an intraday high of $247.90. The same name that took my account apart 27 years ago just doubled in five weeks. 

The mechanic that took me out is the same mechanic that drove the entire move.

Here's how a gamma squeeze actually works, in plain English.

Retail buys calls. The market maker who sold those calls is now short the position and has to hedge by buying stock. The stock goes up. The hedge is out of balance. The market maker has to buy more stock. Meanwhile somebody else just bought a fresh wave of calls, so there's new hedging on top of the original hedging. 

Pretty soon you're buying futures instead of stock, and you've got a perpetual feedback loop.

Nothing breaks that loop except one thing. Volatility.

When demand for calls gets so high that pricing starts to bend structurally, the skew inverts. Out-of-the-money calls start costing more than equidistant puts. 

Puts are almost always more expensive because people use them to hedge, so when that flips you're looking at something that has gone genuinely funky. 

Right now you can see it bending on Apple, Tesla, and Intel. That's the tell that this isn't a market driven by fundamentals.

The signal I watch is volatility going UP with the market going UP. When VIX and VVIX accelerate while the S&P pushes outside the weekly expected move, the prop firms quietly fold their hands. No announcement. 

They just back away and let retail stand there alone.

You cannot time the end of a gamma squeeze. 

I have $82,000 worth of evidence on that. What you can do is structure trades that pay you when the mechanic reverses without sizing into a moving freight train. 

Out-of-the-money bear put spreads. Risk a dollar to make three. The same dynamics that drove it up will drive it down, and when the feedback loop breaks, it doesn't break gracefully. It's violent. Sawtooth. It just goes.

The guys upstairs told me in 1998, "You got out. Could've been a hell of a lot worse." I think about that every single time I'm watching one of these.

If you want to talk through how we're trading the current setup at TheoTrade, the best way to find the right service for your account size is a ten-minute call with our concierge team. You’ll get real person on the line who knows the market and how our products can best serve you. 

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To your success,

Don Kaufman