Gamma Squeeze

A gamma squeeze is a market phenomenon that occurs when a stock's gamma exposure drives up demand for shares, causing its price to rise. It is a relatively new term in the world of finance, made famous by the GameStop short squeeze in early 2021.

To understand gamma squeezes, it's important to first understand what gamma is. Gamma is a measure of the rate of change in an option's delta, which is the measure of how much an option's price will move in relation to changes in the underlying asset's price. Gamma exposure is the amount of money that would be required to hedge a portfolio's option position in response to a change in the underlying asset's price.

When a large number of options contracts are written for a particular stock, it can create a large amount of gamma exposure. If the stock's price begins to rise, the market makers who sold the options contracts will need to buy shares of the stock to hedge their exposure. This buying can create a positive feedback loop, driving the stock's price even higher.

A gamma squeeze occurs when the buying pressure from market makers causes a rapid and significant increase in the stock's price. This can cause short sellers who have bet against the stock to be forced to cover their positions by buying shares, adding even more buying pressure to the market. The result is a feedback loop of buying that can drive the stock's price up even further.

Gamma squeezes can be difficult to predict and can occur suddenly and unexpectedly. They are typically the result of large numbers of options contracts being written for a particular stock and a sudden shift in the stock's price. They can be exacerbated by social media and online forums, as individual traders coordinate their buying and selling activities.

It's important for traders to be aware of the potential for gamma squeezes when trading stocks with high levels of option activity. They should monitor options volumes and gamma exposure to be prepared for sudden price movements. Traders who are short on a stock that is experiencing a gamma squeeze should be especially cautious, as they may be forced to cover their positions at a loss.

In conclusion, a gamma squeeze is a market phenomenon that occurs when a stock's gamma exposure drives up demand for shares, causing its price to rise rapidly. It is a result of large numbers of options contracts being written for a particular stock and a sudden shift in the stock's price. Traders should be aware of the potential for gamma squeezes and monitor options volumes and gamma exposure to be prepared for sudden price movements.