Option Chain Speaks Ahead: Short Force Aggregating and Stocks Ready for Gamma Squeeze

Investors are preparing for a shortened week as the S&P 500 pulls back from record levels and attention turns to Friday’s pivotal nonfarm payroll report. Option flows show a more cautious tone, with traders leaning bearish into the data after the prior release rattled the market. The positioning highlights the potential for turbulence but also creates opportunities if sentiment unwinds. Several equities continue to display bullish setups that could ignite a gamma squeeze should momentum extend.

SPY’s Put/Call volume ratio stands at 1.03 and has been trending lower, while the open interest ratio has risen to 2.56, pointing to a heavier bearish stance among remaining participants. Historically, SPY’s Put/Call OI ratio has moved in line with the underlying price, and it has remained above 2.4 since August 5, above the average level. This dynamic suggests that once mean reversion begins, a pullback could materialize.

Looking at near-term expirations, Friday dominates with 531,000 contracts outstanding as traders position into payrolls. The Put/Call OI ratio there is 2.77 with implied volatility at 11.5%, the highest across the next eight sessions. Elevated volatility inflates premiums and reflects heightened caution.

Strategy: The trading implication is to maintain a bearish stance this week while short exposure builds, but consider scaling back before Friday since options carry heavy premium. Should the payroll number exceed expectations, the abundance of short positions could unwind, driving the market higher. If the report disappoints, an overextension of bearish positioning may still reverse quickly once markets reopen, offering a short-lived rebound.

QQQ shows a more balanced Put/Call open interest ratio, reflecting the recent divergence where the S&P 500 has advanced faster than the Nasdaq 100. Traditional sectors posted stronger earnings, lifting their shares, while technology names showed fatigue after an extended rally ahead of AI-driven results.

For the week’s expiration, activity again centers on Friday. The Put/Call OI ratio stands at 2.23 with implied volatility at 16%. The overall number of contracts is smaller than SPY’s, suggesting a more moderated stance on QQQ following its recent pullback. Against this backdrop, SPX options appear more compelling than Nasdaq’s. The S&P 500 reached a fresh high last week, while the Nasdaq lagged as investors favored broad market exposure rather than pure technology leadership. For hedging, pairing SPY shorts with QQQ longs could offer a neutral approach, with Nasdaq premiums appearing more justified.

Beyond index ETFs, option activity in individual equities points to potential gamma squeeze setups as traders accumulate calls and market makers hedge by buying shares, fueling further gains.

Alibaba (BABA) is one example. Even after the stock surged 13% to 135 last Friday, 1,832 contracts remain open at the 140 strike expiring this week. That is significantly larger than ATM or most ITM strikes, signaling continued bullish conviction and possible follow-through.

UnitedHealth (UNH) shows a similar setup, with 3,478 contracts on the 320 call expiring Friday, while another 1,326 remain at the 325 strike. Combined with heavy ATM positioning, momentum is supported by strong technicals.

AT&T (T) holds more than 29K contracts at the $29.5 ATM and $30 OTM strikes expiring this Friday, with the Put/Call ratio as low as 0.20. Short-term moving averages (3, 7, 10) are trending higher, giving a bullish technical signal and suggesting further upside. With the previous high at 29.65, the stock looks set to break to a new high after the recent consolidation.

Johnson & Johnson’s (JNJ) options are concentrated at the 177.5, 180, and 185 strikes. The Put/Call ratio is as low as 0.25, with notable interest in deep OTM calls at 185, reflecting expectations for greater volatility. The chart setup suggests recovery from consolidation and the possibility of a new bullish trend.

Alphabet (GOOGL) is another case, with 31,000 contracts open on the 220 call, second only to the 210 strike. Put activity is far lighter, with a Put/Call ratio of 0.35, indicating solid sentiment despite the broader market pullback.