Gamma Squeeze
Market MechanicsWhen heavy call option buying forces market makers to buy the underlying stock to hedge, which pushes the price up, which forces more hedging — a mechanical feedback loop that can send a stock vertical.
A gamma squeeze is a derivatives-driven price acceleration mechanism triggered by large-scale call option purchases that force market makers into increasingly aggressive delta-hedging activity. When retail or institutional participants buy substantial quantities of out-of-the-money call options, the dealers who sell those calls must purchase the underlying shares to hedge their short-gamma exposure. As the stock price rises toward and through the strike prices, the dealers' required hedge ratio (delta) increases — they must buy more shares. This buying elevates the stock price further, triggering additional delta hedge buying across more strikes. The feedback loop continues until either the gamma exposure is exhausted (options expire or are exercised), new sellers step in, or the underlying moves far enough that dealers' hedge needs plateau.
Retail traders or coordinated buyers purchase large volumes of out-of-the-money call options — typically at strikes 10–20% above the current price. The options are cheap individually but the aggregate notional exposure is enormous. Market makers are now short a massive amount of gamma.
To remain delta neutral (not exposed to directional moves), market makers who sold the calls must buy the underlying stock. Initially, OTM options have low delta (~0.20–0.30), so the hedging is modest. But as the stock starts moving up, delta increases.
As the stock rises toward the strike prices, gamma spikes — delta starts moving rapidly. Market makers must dramatically increase their hedge by buying more shares. This additional buying pushes the stock up further. At the money, delta approaches 0.50 and is changing fast. The feedback loop accelerates.
The squeeze ends when either the options expire (removing the hedging need), new short sellers step in with enough supply to absorb the demand, or the buying demand dries up. After exhaustion, stocks that were gamma-squeezed often collapse just as fast as they rose — the same dealers begin selling their hedge shares as delta falls.
AMC Entertainment in May–June 2021: coordinated retail call buying drove a gamma squeeze that took AMC from $10 to $72 in under two weeks. Options market makers were forced to purchase tens of millions of shares to hedge their escalating call exposure. The stock had no fundamental basis for the move — it was entirely a derivatives-driven mechanical event. It fell back to $15 within months as the gamma exposure unwound.
Gamma squeezes are self-terminating events. The moment the mechanical buying pressure exhausts — options expire, dealers finish hedging, new supply enters — the stock has no fundamental support at the squeezed price and typically mean-reverts violently. Buying into a gamma squeeze in progress is one of the highest-risk trades in markets: you are betting the mechanical buying has further to run, with no fundamental floor beneath you if it stops. The exit is always more crowded than the entrance.