Understanding Gamma Squeeze

A Gamma Squeeze is a market phenomenon where a rapid, large-scale purchase of call options forces market makers (who sold those options) to buy the underlying stock to hedge their position. This buying pressure drives the stock price up, which increases the Delta of the calls, forcing market makers to buy even more stock. This creates a reflexive, self-reinforcing upward spiral.

How it Happens:

• Step 1: Retail/Institutional traders buy massive amounts of Out-of-the-Money (OTM) call options.
• Step 2: To remain "delta neutral," the market makers who sold these calls must purchase the underlying stock.
• Step 3: As the stock price rises, the Delta of these calls increases (due to high Gamma).
• Step 4: Market makers must buy even more shares to stay hedged, creating a feedback loop that pushes the stock price to extreme, unsustainable levels.

A Gamma Squeeze is extremely dangerous for short sellers. If you are shorting a stock that is undergoing a squeeze, your potential losses are theoretically infinite. For long-term traders, a Gamma Squeeze often creates a "bubble" peak—once the option buying slows, the support from market maker hedging evaporates, often resulting in a sharp and rapid correction.