Are U.S. Markets Acting Like Meme Stocks? Some Actions Have Investors Worried.

Subscribe to enjoy similar stories.U.S. stocks have been on a tear, with the S&P 500 rising nearly 20% from the lows of late March and plowing past risks linked to surging oil prices, rising inflation, and the Iran war.Tech stocks have been scorching, with the Nasdaq rising nearly 30% from its March 30 nadir, powered in part by an astonishing gain of nearly 70% for an index of chip stocks and a 25% surge in the value of the Magnificent Seven.But developments in the options market are starting to raise questions about the strength of the spring rally and its staying power into the summer months.Similar questions arose five years ago during the demise of meme stocks, which got that name because they rise and fall with social media buzz and not business fundamentals.Meme stocks often suffer from what’s called a “gamma squeeze,” triggered in part by the buying of call options.Call option buyers have the right, but not the obligation, to purchase underlying shares at a certain price in the future.

Call option sellers will buy the stocks linked to the contract to hedge their risk, in order to stay market neutral, and rely on the collection of fees and the time before the option expiry to make their money.U.S. stocks, at the benchmark level, have seen a massive run in call option buying this month, with seven of the biggest volume days of all time reached over the past 10 days, including around 45 billion in premium traded on Thursday.That seems to have led to a change in the “market risk” of those options (called delta), with the speed of that increase expressed in what’s known as gamma.To keep pace with the risk, options sellers are forced to buy stocks in order to maintain their hedges, resulting in the “gamma squeeze” of