Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Gamma Squeeze ====== A Gamma Squeeze is a rapid and often explosive increase in a stock's price, triggered by the hedging activities of [[options]] market makers. Imagine a snowball rolling downhill, getting bigger and faster—a gamma squeeze is like that, but for a stock's price going //up//. The squeeze begins when there's a sudden, massive demand for short-term [[call options]], particularly those that are //out-of-the-money// (meaning their [[strike price]] is higher than the current stock price). To meet this demand, [[market makers]] sell these call options. However, to protect themselves from potentially unlimited losses if the stock price soars, they must hedge their position by buying the underlying stock. The "gamma" in the name refers to a key variable in options pricing. As the stock price rises closer to the options' strike price, the gamma effect accelerates, forcing market makers to buy more and more shares at an ever-increasing rate. This frantic buying creates a powerful feedback loop, pushing the stock price even higher and squeezing it upwards. ===== The Mechanics of a Squeeze ===== Understanding a gamma squeeze is like learning a recipe for financial fireworks. It requires a few key ingredients: a surge in speculative interest, market makers doing their job, and a bit of complex options math that creates a powerful chain reaction. ==== The Setup: A Surge in Call Options ==== The stage is set when a large group of investors, often coordinating on social media, decides to pile into call options of a single stock. This is common with so-called [[meme stocks]]. They typically buy cheap, out-of-the-money calls with short expiration dates. This act alone doesn't move the stock price much, but it lights the fuse. By buying calls, they are betting the stock's price will rise significantly, and quickly. ==== The Players: Meet the Market Makers ==== On the other side of these trades are the market makers. Their job is to provide [[liquidity]], meaning they stand ready to buy when you want to sell and sell when you want to buy. When thousands of investors rush to buy call options, market makers sell them. In doing so, they accumulate a massive [[short call]] position. This is a risky spot to be in—if the stock price skyrockets, the market maker's losses on those calls are theoretically infinite. ==== The Hedging: Taming the Delta ==== To manage this risk, market makers engage in [[delta hedging]]. [[Delta]] is an option's sensitivity to a $1 change in the underlying stock's price. To remain [[delta neutral]] (i.e., hedged), a market maker who is short call options must buy a certain number of shares of the underlying stock. For example, if a call option has a delta of 0.20, the market maker will buy 20 shares of the stock for every option contract (which typically represents 100 shares) they sold. This initial buying pressure can give the stock a gentle nudge upward. ==== The Trigger: Enter Gamma ==== This is where things get explosive. [[Gamma]] measures the //rate of change// of an option's delta. As the stock price rises and gets closer to the strike price of all those call options, gamma goes into overdrive. A rising gamma means that the delta is increasing at an accelerating pace. So, that option with a delta of 0.20 might suddenly have a delta of 0.40, then 0.60, then 0.90. For the market maker, this is a nightmare. To stay hedged, they are forced to buy more and more shares, and to do so faster and faster. ==== The Feedback Loop ==== This forced buying from market makers creates a vicious cycle. * Step 1: Investors buy call options. * Step 2: Market makers sell the calls and buy the stock to hedge. This pushes the stock price up. * Step 3: The rising stock price increases the gamma, which rapidly increases the delta of the options. * Step 4: To stay hedged against the new, higher delta, market makers must buy //even more// of the stock. * Step 5: This aggressive buying sends the stock price soaring, and we return to Step 3. This self-perpetuating loop is the gamma squeeze. It continues until the buying frenzy exhausts itself or the options expire. ===== Gamma Squeeze vs. Short Squeeze ===== While they can feel similar from the outside and even happen at the same time, a gamma squeeze and a [[short squeeze]] are two different beasts. * A **Gamma Squeeze** is driven by options market makers buying the underlying stock to hedge their positions. The fuel is options activity. * A **Short Squeeze** is driven by investors who have shorted a stock (betting its price will fall) being forced to buy shares to close out their losing positions. The fuel is covering short sales. The infamous [[GameStop]] saga in 2021 was a perfect storm where both a gamma squeeze and a short squeeze occurred simultaneously, feeding off each other to create a historic price surge. ===== A Value Investor's Perspective ===== For followers of [[value investing]], the lesson from gamma squeezes is simple: //stay away//. ==== Speculation, Not Investment ==== Gamma squeezes are pure speculation. The price movements have nothing to do with a company's underlying fundamentals, its earnings, or its [[intrinsic value]]. They are temporary dislocations driven entirely by market mechanics and mob psychology. Trying to profit from them is not investing; it's gambling on timing and momentum, a game where the odds are stacked against you. ==== The Risks are Extreme ==== While the stories of quick profits are tantalizing, the reality is that these events are wildly unpredictable. What goes up like a rocket can come down like a rock. For every person who buys at the bottom, many more pile in near the top, only to suffer catastrophic losses when the party ends and the price collapses back to reality. The market makers eventually unwind their hedges, and the artificial buying pressure vanishes in an instant. ==== Stick to Your Knitting ==== The core philosophy of value investing is to buy wonderful businesses at fair prices and hold them for the long term. As Benjamin Graham taught, "In the short run, the market is a voting machine but in the long run, it is a weighing machine." A gamma squeeze is the voting machine at its most hysterical. A prudent investor focuses on the "weighing"—the true, long-term worth of a business—and leaves the speculative fireworks to others.