Gamma Squeeze

What happens during a Gamma Squeeze?

In a gamma squeeze, investors usually acquire a significant number of out-of-the-money call options. To balance out their exposure from these call sales, Market Makers (MMs) buy shares. In such scenarios, the Market Maker Gamma Exposure is typically negative.

The GEX to Volume ratio sheds light on the gamma exposure's significance compared to the stock's average daily trading volume.

  • A gamma squeeze occurs when the buying or selling activity related to options hedging becomes a dominant force driving the price of the underlying asset.

  • As the price of the underlying asset approaches a strike price with significant open interest, MMs must adjust their positions more aggressively to remain delta-neutral, especially if the gamma exposure is high (negative GEX). This can lead to a feedback loop: as the price rises, MMs buy more shares to hedge, which in turn pushes the price up even further.

  • The squeeze intensifies when there are multiple strike prices with high open interest (often referred to as a "call ladder"), leading to successive waves of buying as each strike price is surpassed.

Relationship between Gamma exposure and Gamma Squezee

  • A gamma squeeze is directly influenced by gamma exposure. When gamma exposure is significantly negative, the potential for a gamma squeeze increases. The negative GEX indicates that MMs will need to buy more and more shares as the price rises, creating a feedback loop that can drive the price up rapidly.

  • It's important to note that while a negative GEX can set the stage for a gamma squeeze, other factors such as overall market sentiment, news, and the actions of retail and institutional investors can also play a crucial role in whether a gamma squeeze actually occurs.

In summary, gamma exposure provides insight into the potential hedging actions of market makers, and when this exposure is significant and negative, it can lead to the conditions ripe for a gamma squeeze.

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