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A gamma squeeze occurs when heavy call buying forces market makers to delta-hedge by purchasing the underlying stock, which pushes the price higher, making the calls more in-the-money and requiring even more hedging. This positive feedback loop can cause explosive, non-fundamental price moves.
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Key takeawayNever sell naked calls on low-float stocks with high short interest and surging call volume. A gamma squeeze can produce 100-500% moves in days. Use defined-risk spreads if you must sell call premium in squeeze-prone names.
💡 Why It Matters
Gamma squeezes represent the single largest risk to naked call sellers. The positive feedback loop between call buying, dealer hedging, and price increases can produce moves of 100-500% that no reasonable stop loss can protect against.
⚙ How It Works
When traders buy OTM calls, market makers sell those calls and delta-hedge by buying shares. As the stock rises, the calls move closer to ATM, increasing their delta. Market makers must buy more shares to maintain their hedge, pushing the price higher and creating a self-reinforcing loop.
📋 Example
A stock at $20 with 40% short interest sees 200,000 OTM call contracts bought at the $25 and $30 strikes. Dealers buy 5 million shares to hedge, pushing the stock to $25. Delta increases force another 3 million shares of buying, stock reaches $35. Within two days, the stock hits $60 in a full gamma squeeze.
⚠ Common Mistakes
Traders sell calls on gamma-squeeze candidates thinking the move is unsustainable. While it may be unsustainable fundamentally, the mechanical nature of dealer hedging can push prices far beyond rational levels before reversing. Never fight a gamma squeeze with naked short calls.
❓ FAQ
What is Gamma Squeeze?
A gamma squeeze occurs when heavy call buying forces market makers to delta-hedge by purchasing the underlying stock, which pushes the price higher, making the calls more in-the-money and requiring even more hedging. This positive feedback loop can cause explosive, non-fundamental price moves.
Why does Gamma Squeeze matter for premium sellers?
Never sell naked calls on low-float stocks with high short interest and surging call volume. A gamma squeeze can produce 100-500% moves in days. Use defined-risk spreads if you must sell call premium in squeeze-prone names.
How does Gamma Squeeze work?
When traders buy OTM calls, market makers sell those calls and delta-hedge by buying shares. As the stock rises, the calls move closer to ATM, increasing their delta. Market makers must buy more shares to maintain their hedge, pushing the price higher and creating a self-reinforcing loop.
What are common mistakes with Gamma Squeeze?
Traders sell calls on gamma-squeeze candidates thinking the move is unsustainable. While it may be unsustainable fundamentally, the mechanical nature of dealer hedging can push prices far beyond rational levels before reversing. Never fight a gamma squeeze with naked short calls.
Related Terms
0DTE
Options expiring on the current trading day — zero days to expiration.
Backwardation
When near-term VIX exceeds longer-term VIX (VIX/VIX3M ratio above 1.0).
Block Trade
A block trade is a privately negotiated options transaction of at least 50 contracts (varies by exchange) that is executed off the public order book and then...
Charm Exposure
The aggregate delta decay across all options in a dealer hedging book.
This is not financial advice. Read our full investment disclaimer.