Now that we’ve covered the gamma squeeze meaning, let’s look closer at the conditions under which gamma squeezes occur. This process then increases the price even more, encouraging additional investors to pile in and buy the stock. Market participants buy short-dated call options of the affected stock, increasing demand. There is a flurry of activity on the derivatives market. In many cases, investors need to change their positions. When pricing options, they use the Black-Scholes-Merton pricing equation – a formula that allows them to estimate option value given current market conditions.ĭuring a gamma squeeze, the price of stocks changes considerably. Instead, they trade with a market maker – a participant in an exchange that buys and sells securities for their own account.Īs with other market participants, the goal of the market maker is to generate a profit. Traders do not buy and sell options to individual investors.

A gamma squeeze is a more extreme version, which leads to additional stock-buying activity and further price hikes. So, what is a gamma squeeze, and how exactly is it different from a conventional squeeze? The latter is more common and refers to instances when investors who sold their stock short due to rising prices are trying to buy back those shares. These are common features of the derivatives market that can come in the form of a gamma or short squeeze. When this happens, investors feel the “squeeze” and enter or exit positions outside of their normal trading patterns. In investing, rapid changes in the price of assets – particularly stocks – occur all the time.

Gamma squeeze