Hey trader,
Somebody bought about 20,000 Hertz puts this morning. Someone in my session guessed the put buying was a bet on bankruptcy.
It’s a fair guess, since a put is basically a bet that a stock falls. I think this one’s probably a hedge, though.
You’ll want to know the difference. A hedge like this can turn a print that looks bearish into a long setup.
The dealer who sold those puts shorted Hertz shares right away to stay protected. If Hertz doesn’t fall, the dealer needs less of that protection as expiration gets closer.
Buying those shares back can lift the price. Traders call that charm, which is basically how time changes an option’s sensitivity to the stock.
Working through that print led me to a trade risking about 20 cents on a call worth $1 if Hertz gets to $3.
Before I get to it, you need to know what makes Hertz a little unusual.
Why Hertz Put Buying Flips the Usual Gamma Read
Gamma exposure, or GEX, is basically a map of where dealer hedging tends to speed price up or slow it down. It assumes institutions buy puts and sell calls.
Hertz doesn’t fit that assumption. When I pulled it up on the Console, it showed 67% of the float sold short and a short ratio of 6.79 days.
A short ratio is essentially how many days of normal volume it would take short sellers to buy back their shares.
With that much short interest, traders usually buy calls and sell puts on Hertz. The shorts need those calls as a hedge in case of a massive short squeeze.
The gamma map on Hertz probably reads the exact opposite of what it shows. Today’s put buying runs completely contrary to what I’d normally expect, too.
What the Dealer Has to Do Next
Here’s how I see the trade. An institution that’s probably long Hertz buys puts to protect itself, and the dealer on the other side ends up short those puts.
That dealer hedges by shorting Hertz shares the moment the trade comes through.
The dealer’s short puts also add negative gamma. That basically means dealer hedging makes moves bigger in both directions.
The put buy only turns truly bearish if Hertz drops to and through the strike. If it doesn’t, charm starts working on the position.
These puts sit way out of the money, meaning the strike is well below the stock price. As time runs down without a drop, they lose delta and move less with the stock.
The dealer then needs fewer short shares to stay hedged. Buying them back gives Hertz some lift.
Out-of-the-money hedges like this one sometimes don’t contribute much on their own. The timing of the hedge can.
I wouldn’t call today’s trade bearish. As long as Hertz holds the wall below it, the trade adds just a teeny bit of upside pressure.
Where the $1.50 Wall Comes In
Hertz has 91,000 contracts of open interest at the $1.50 strike. Open interest is simply the number of contracts still on the books.
I think most of those puts were sold, which fits a heavily shorted stock. They create support at $1.50.
Positive gamma sits around that level. Essentially, dealer hedging slows the selling as price gets close.
That $1.50 level has held Hertz up before, too.
Calls are being bought up toward $2. That builds negative gamma above it, which can work like an accelerator.
If Hertz breaks through, it could set off a massive short squeeze. We saw that kind of move in August, when earnings carried the stock from $1.50 to a high of $3.
How I’d Trade It
Today’s put buy won’t drive a short squeeze by itself. It did lead me to a setup with low risk and a big potential reward.
Here’s how I’d lay it out:
- Setup: Buy the $2 call in the December expiration, about 78 days out.
- Cost: About $0.20.
- Breakeven: $2.20 at expiration.
- Target: $3, where the call is worth $1. That’s $0.80 of gain on $0.20 of risk, or about 4-to-1.
- Invalidation: A break below $1.50 takes me out.
- Edge: The $1.50 put wall supports the stock. Negative gamma above $2 can speed up a squeeze in a stock with 67% of its float sold short.
If you’d rather start in the money, the $1.50 call runs about $0.40 to $0.43. Breakeven sits around $1.90.
At $3, that call is worth $1.50. On a $0.40 entry, that puts the gain close to 300%.
You can also roll as Hertz climbs. If it gets to $2, I’d roll the $1.50 call up to the $2, then keep going at $2.50 and $3 while booking profits along the way.
I won’t pretend the odds on this trade are high. I do think there’s a decent chance of making money with the $1.50 strike.
Earnings land in about a month, and this position runs through them. I’m not trying to make 50% here, since I’m looking for $3.
The next time a big put print shows up on a cheap strike way out of the money, check who’s likely on the other side before you read it as bearish. The dealer’s hedge might be the thing pushing the stock higher.
I didn’t go looking for a squeeze candidate in Hertz today. One print on the Console led me there, and working out what the dealer had to do turned it into a setup.
I do that work with members every session. The 90-Day Block Hunter Challenge is where I hand you the same tools I used today.
Here’s what you get when you join:
- The Block Hunter Console, scanning hundreds of names for hidden pressure.
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The next print that looks bearish might be pointing the other way. Your next 90 days start today, and your seat is protected by a full 30-day money-back window.
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Brandon Chapman, CMT
Creator of Ghost Prints
