Gamma Squeeze

Gamma squeeze is a phenomenon in the stock market that occurs when a large number of options traders bet on a stock’s price to move in a specific direction. The term “gamma” refers to the rate of change in the delta of an option, which is a measure of an option’s sensitivity to changes in the underlying stock price.

In a gamma squeeze, a large number of options traders purchase call options, which give them the right to buy the stock at a specific price. This increase in demand for call options drives up the price of the options and also increases the delta of the options. As the delta of the options increases, so does their sensitivity to changes in the underlying stock price.

This increased sensitivity to stock price changes can result in a feedback loop, where small price movements in the underlying stock trigger large price movements in the options, leading to further price movements in the underlying stock. This feedback loop creates upward pressure on the stock price, causing a squeeze in the price of the underlying stock.

The gamma squeeze can result in rapid and substantial price movements in the stock, which can be beneficial for traders who are positioned correctly, but can also result in significant losses for traders who are not properly hedged.

It is important to note that gamma squeezes are not limited to the options market and can occur in other financial instruments such as futures and exchange-traded funds (ETFs). Additionally, gamma squeezes are typically driven by large institutional traders, rather than retail traders, and can be difficult for individual investors to profit from.

In conclusion, gamma squeeze is a phenomenon that results from a large number of options traders betting on a stock’s price to move in a specific direction. It can result in rapid and substantial price movements in the stock, but can also result in significant losses for traders who are not properly hedged.