What is a gamma squeeze

A gamma squeeze is a rapid increase in a stock's price, driven by the interplay of various financial market dynamics, most notably in the options market. Here's a detailed explanation: 1. **Definition and Characteristics**: - A gamma squeeze occurs when there is a sudden and significant increase in the price of an underlying asset, such as a stock, triggered by the buying pressure of options traders. - It is characterized by a rapid rise in the asset's price, often driven by speculative buying of call options, which forces market makers to buy more shares to hedge their positions. 2. **Causes of Gamma Squeeze**: - Gamma squeezes typically happen when there is widespread speculation about the future price of a stock, leading to increased buying activity in call options. - They can also occur due to unexpected news or events that create market volatility and force market makers to hedge their positions. 3. **Impact on Investors**: - Gamma squeezes can present opportunities for investors who are long the stock, but they also carry risks, especially for those who are short the stock or have positions that are heavily exposed to options hedging activity. - The sudden price movements associated with gamma squeezes can be volatile and difficult to navigate, making them challenging for investors who are not well-versed in options trading strategies. 4. **Examples of Gamma Squeeze**: - One of the most well-known examples of a gamma squeeze occurred in early 2021 with AMC Entertainment, which experienced dramatic gains after a widespread short squeeze and gamma squeeze combined. - Other examples include the gamma squeeze on GameStop in 2021, which was fueled by retail trader activity and contributed to the stock's unprecedented price increases. In summary, a gamma squeeze is a market phenomenon where the buying pressure for options contracts, particularly call options, triggers a rapid increase in the price of the underlying stock. This can create a self-perpetuating cycle where market makers are forced to buy more shares to hedge their positions, leading to further price increases. While gamma squeezes can present opportunities for investors, they also carry significant risks due to the volatility and speculative nature of the events that trigger them.