Rocket Companies, Inc. Soars After Short/Gamma Squeeze

The WallStreetBets community on Reddit, which entered the national spotlight after the massive run in shares of Gamestop, has set their sights on another company - Rocket Companies, Inc.

Rocket Companies Inc., which went public in August of 2020, was formerly known as Quicken Loans. The company was co-founded by Dan Gilbert, who also owns the NBA's Cleveland Cavaliers.

The company attracted the attention of the WallStreetBets community due to:

1) Large short interest (nearly 40% of shares are short)
2) Meme name (Rocket Companies, Inc.)

Over the past few days, mountains of out-of-the-money calls were purchased. This was lighting the fuse for the move that was to come.

As we've discussed on this site before, market makers will usually hedge their OTM call sales by buying common shares. As the stock rises, the gamma (rate of change of the Delta) will increase, which forces market makers to buy more shares. This is called a "gamma squeeze".

Also, short-sellers will panic due to the quick rise of the common shares, and they will either cover voluntarily or involuntarily.

This adds to the upwards pressure.

On top of that, retail traders will pile into the stock as well, snapping up shares and driving the stock even higher.

This creates a loop - market makers need to buy more shares to hedge their positions, short-sellers will buy more shares to cover their positions, retail traders will buy more shares to speculate on the stock going higher.

-

This results in what you are witnessing today - shares of RKT are up roughly 40%.

Filed under: General Knowledge