Hidden $NXTD Gamma Slingshot : pennystocks


I’ve been following NXTD for some time based on the congested options chain. NXTD has an interesting technical setup and recently found hidden gamma in the play. Something not immediately obvious. 

On October 18th, the stock underwent a reverse stock split (10:1) where 10 shares of NXTD converted to 1 share of new NXTD. However, the old options landed in purgatory. Looking at the data on Fidelity, the delta and premiums are bizzare looking.

So I wondered, how do I look at these options and how do I account for these in gamma calculations? What I found was significant gamma slingshot potential above the $7.5 strike.

Start with Option Value

Options can get screwy for all sorts of reasons, stock split, special dividend, and reverse split. For a stock split, we just adjusted the OI, for special dividend, the strike is adjusted down by the dividend amount, but for reverse split… well, it’s much more complicated.

It would make sense to simply multiply the strike by the split ratio but… in NXTD, they didn’t do that. So what we have are $0.5, $1, $1.5, and $2.5 calls that go from OTM to ITM and puts that go ITM to OTM. If you’re like me, you’re wondering how can this work? Money glitch?

No glitch, because look at the $0.5 strike. The delta is… 0.0877..? How can this be so ITM with such low delta?

Let’s start with the basics. On 10/18, The old option OI and strike stayed the same. However, the options communication spells out that the contract delivery changes down to 10 shares. 

That 10 share adjustment compensates for the odd situation of ITM options because it introduces a deficit between contract exercise cost and delivered value. Example:

              I own (1) $0.5 strike call that gets adjusted down to 10 share delivery

              It still costs me $50 to exercise ($0.5 x 100) but I am only delivered 10 shares

              If price is trading at $3 then the actual delivered value is $30 (10 x $3)

The option is ITM but no one would do this. On the other hand, if price trades at or above $5 then the delivered value will exceed the exercise cost. For this reason, these old options operate as if the strike WAS adjusted by 10x. Basically, the $0.5 will behave like a $5 strike option, $1 like $10, etc etc. If we lay out by equivalent strike and divide adjusted OI by 10, we have a call OI like the, including both adjusted and ordinary calls:

Calculating Options Gamma

Ok, so the strike is 10x what is listed (for true option value), now we need to look at the net effect on delta. The OI for these contracts did not change; just the number of shares delivered. When accounting for delta, we should use 10 shares not 100 shares. The net delta will then be option delta x 10 shares. Delta is determined based on 10x strike ($0.5 behaves like $5, etc).

Typically want to look at the gamma of an options chain (net delta). How much of the float will be used to hedge as underlying prices rises:

r/pennystocks - Hidden $NXTD Gamma Slingshot

This is a tricky exercise and you might ask, why go through the leg work? Take a look at the chart above and you can see that without these adjusted options, we may miss up to 2.5% of hedging of the float. This is because the adjusted option delta is most influential at $5 and above. It adds gamma much higher than the chain would suggest. 

Why Does All This Matter?

These adjusted options provided gamma at higher prices, particularly leading into $6 (70% float delta hedged). It also shifts peak gamma to ~$3.5 instead of sub $3. This may indicate why $3.5 has resistance. Neither MMs nor shorts want this to hit peak gamma. Otherwise, the slingshot peaks at and above this number. 

For this play, the gamma opportunity will likely be driven by bullish OI on the $2, $2.5, and $3 calls. These strikes provide the initial momentum to push price to and through $3.5.

However, there’s another dimension that may help sling this forward also. Shorts have buried this with SI and the CTB is really high. If you look at the CTB, you can see that despite any price action, it has been rising consistently over time indicating increasing strain on the short positions.

r/pennystocks - Hidden $NXTD Gamma Slingshot
r/pennystocks - Hidden $NXTD Gamma Slingshot

I calculate an average short cost basis of $3.22 and with a 100% margin requirement, it’s possible shorts would liquidate somewhere around $6.44. Looking at the change in short cost basis shows that shorts are drilling into the price despite low cost basis.

r/pennystocks - Hidden $NXTD Gamma Slingshot

A huge gamma ramp, high SI, low short cost basis, and increasing CTB could launch NXTD. I will be looking for activity on the $2, $2.5, and $3 calls (high delta calls) to initiate momentum upward.

TL;DR

  • The pre-split options provide gamma at and above $5 that is not immediately obvious. 

  • Calculations show actual peak gamma at $3.5 and strong gamma through $6. 

  • The pre-split options provide up to 2.5% float hedged.

  • High SI and increasing CTB at current prices. Average short cost basis of $3.22.

  • Potential to launch price dependent on OI hitting the $2c, $2.5c, and $3c strikes.



Source link

Copyright © 2022 Billionaire Club Co LLC. All rights reserved

Chat
Loading the chat ...