Gamma Squeeze
Quick Definition
A rapid price increase caused by market makers buying the underlying stock to delta-hedge their short call positions as prices rise and gamma amplifies.
What Is Gamma Squeeze?
A gamma squeeze occurs when rising stock prices force options market makers who have sold call options to buy increasing amounts of the underlying stock to maintain delta-neutral hedges. As the stock price rises, call option deltas increase (driven by gamma), requiring market makers to buy more shares. This additional buying pushes the price higher, which further increases deltas, creating a self-reinforcing feedback loop. Gamma squeezes are most powerful when there is heavy call option buying by retail traders, concentrated open interest at specific strike prices, and limited stock float. The phenomenon gained mainstream attention during the GameStop (GME) short squeeze in January 2021, where massive call buying amplified the stock's parabolic move. Gamma squeezes eventually unwind when buying pressure subsides or options expire.
Gamma Squeeze Example
- 1Retail traders buy thousands of OTM call options on a heavily shorted stock. As the stock rises 10%, market makers must buy shares to hedge, pushing it up another 20%
- 2During the GME gamma squeeze, call option open interest surged to record levels, and market maker hedging accounted for an estimated 40-50% of the stock's daily volume
Related Terms
Gamma (Options)
A Greek that measures the rate of change of delta for a $1 move in the underlying, indicating how quickly an option's directional exposure shifts.
Delta Hedging
A strategy that offsets the directional risk of an options position by trading the underlying asset in proportion to the option's delta.
Delta (Options)
A Greek that measures how much an option's price changes for a $1 move in the underlying asset, also approximating the probability of expiring in the money.
Open Interest
The total number of outstanding derivative contracts that have not been settled, closed, or expired, indicating market participation and liquidity.
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
Put Option
A contract giving the holder the right, but not the obligation, to sell an underlying asset at a specified price within a specified time period.
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