RiskPicksWhat is a Gamma Squeeze?
A gamma squeeze happens when rising stock prices force market makers to buy increasingly large amounts of the underlying stock to hedge call options they have sold. This buying pushes the price up further, which forces more hedging, creating a feedback loop that can drive explosive short-term moves.
How it works step by step
- Traders buy call options: a surge of call option buying (especially short-dated, slightly out-of-the-money calls) creates large open interest
- Market makers sell those calls: as the counterparty, market makers are now short the calls and need to hedge
- Delta hedging: to stay neutral, market makers buy shares of the underlying stock proportional to the delta of the options they sold
- Stock rises: the hedging buying pushes the stock price up. As price rises, the delta of the calls increases (this rate of change is gamma)
- More hedging required: higher delta means market makers must buy even more shares. The buying accelerates
- Feedback loop: more buying pushes price higher, which increases delta, which requires more buying
Famous examples
- GameStop (January 2021): retail traders on Reddit bought massive amounts of call options. Market maker hedging combined with a short squeeze drove the stock from $20 to $483 in two weeks
- AMC (June 2021): similar retail-driven call buying created a gamma squeeze alongside short covering
Gamma squeeze vs short squeeze
- Gamma squeeze: driven by options market mechanics. Market makers buy stock to hedge. The fuel is call option open interest
- Short squeeze: driven by short sellers buying to cover losing positions. The fuel is short interest. See Short Squeeze
- They often happen together: the combination of both is what creates the most explosive moves
Gamma squeezes unwind just as fast as they build. When the call buying stops or options expire, market makers sell their hedging shares, and the stock can drop rapidly.