The gamma squeeze

SPEAKER_1 (0:00)

I'm a big believer in providing the typical American worker more access to the types of investments that high net worth investors and institutional investors have used for a long time in their portfolios and are continuing to look for to generate returns.

SPEAKER_2 (0:16)

To hear more about employer-based retirement plans and the current state of retirement readiness, subscribe to P-Gym's The Outthinking Investor in your favorite podcast app.

Katie Martin (0:33)

Pushkin.

Sometimes it feels like the only stock that matters in the whole world is the mighty Nvidia. It's really important to understand what makes this stock go up and down and why. And there's been some funny business going on recently, particularly in the form of, scary voice here, a gamma squeeze. Options markets are basically making a crazy, hypey stock act even more hypey. So today on the show, we're going to be asking, is hypey even a word? And more importantly, what's going on with this options stock market feedback loop?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the Financial Times in London. And I'm joined today for the very first time by the very lovely George Steer, who is a markets reporter here also in London, but fresh from a stint in New York. George, which is better, New York or London?

George Steer (1:33)

Good question. I'm gonna say New York, sorry.

Katie Martin (1:39)

Ah, you're fired.

George Steer (1:39)

It's more expensive, but yeah.

Katie Martin (1:42)

Controversial stuff there. Okay, so give us a sense, right? Like I say, you're just back from the Big Apple and Nvidia is the only stock that anybody can talk about. Just how big of a talking point is this among professional fund managers now? I can't move for people talking about Nvidia.

George Steer (1:58)

It's become Wall Street's darling stock, for sure. It's up something like 150% since the start of the year. It's quintupled or more than quintupled since the start of 2023 It's responsible for something like a third of the S&P 500's gains this year alone.

And it's incredibly volatile. So a lot of people can make a lot of money betting on it every single day. Yeah, it's all everyone's talking about.

Katie Martin (2:22)

I mean, it's mad, isn't it? And like, obviously it's part of this big AI chips kind of boom, but just the size of this company is nuts, right? So it's bigger than JP Morgan plus Berkshire Hathaway plus Meta combined. Am I right in that?

George Steer (2:37)

Yep. Yesterday, I think it was valued at just over $3 trillion. So for a moment, at least, it became more valuable than Apple, just behind Microsoft in second place.

Katie Martin (2:48)

This thing has legs. So look, one of the reasons why this stock is up so massively is because the company is doing all sorts of well at the moment. Every time it puts earnings numbers, it's like, oh, that number that you had in mind, double it. They just cannot stop making money at the moment. What sort of scale are we talking about?

George Steer (3:07)

I think its first quarter results, which it announced last month, revenues are up 262%, something like that. I was speaking to an analyst the other day who said he's never come across a company that has so consistently beaten and raised, beaten and raised, beaten and raised.

Yeah, it's unstoppable. And anyone who questions whether it's overvalued, one easy response to that is that, no, it's making a lot of money doing what it's doing.

Katie Martin (3:34)

The stock is up a lot, but it's not up as much as the revenues. So there's a decent argument, crazy as it sounds, that this thing is actually undervalued.

George Steer (3:41)

Yeah. It's valued at just over 40 times earnings for the next 12 months, which isn't crazy and is below where it was valued a year ago during the first kind of AI hype wave.

So it's expensive, but not stupidly so.

Katie Martin (3:56)

So on top of that, you do have some slightly funny business going on with this stock, right? Which you were writing about the other day. And the sort of fancy pants clever word for this is a gamma squeeze, which makes it all sound like super, super clever.

Break it down for us a bit. This all relates to the options market, right?

George Steer (4:14)

Yeah. So Nvidia has a huge, huge options market.

Options being kind of little derivative bets that you can make on the direction of its share price.

Katie Martin (4:23)

So if you're an investor, you can say, I think this thing's going up. I'm not going to buy the stock itself, but I'm going to buy a little contract that will pay me money if the stock goes up, which is kind of, you know, the same bet is still a bet on Nvidia, but it is just a little bit different.