What is a Gamma Squeeze? Definition, Formula, and Example
A gamma squeeze is a self-reinforcing upward price spike caused when options market makers are forced to continuously buy the underlying stock to delta-hedge short call positions as price rises, with each purchase further increasing the price and triggering additional required hedging.
What Is a Gamma Squeeze?
A gamma squeeze is a self-reinforcing upward price spike triggered when options market makers must continuously buy increasing quantities of the underlying stock to delta-hedge their short gamma exposure as the stock price rises. Each round of hedging purchases pushes price higher, which increases the delta on outstanding short calls, which forces the market maker to buy still more shares — a compounding feedback loop. Gamma squeezes are distinct from short squeezes in their mechanical driver: short squeezes force short sellers to cover; gamma squeezes force dealers to hedge. The two mechanisms frequently co-occur.
How a Gamma Squeeze Works
When retail or institutional buyers purchase large volumes of short-dated, out-of-the-money call options, the market maker writing those calls holds a short gamma position. Gamma (Γ) is the rate of change of delta per $1 move in the underlying:
Γ = ∂Δ / ∂S = ∂²V / ∂S²
As price rises toward and through the strike, delta increases sharply (gamma is highest near at-the-money). The market maker's required delta hedge grows accordingly.
Approximate hedging pressure: If a dealer is net short 50,000 call contracts (5 million shares of notional) with average gamma of 0.06, a $1 price increase forces the purchase of 0.06 × 5,000,000 = 300,000 additional shares. At peak gamma (near the strike), this number spikes further. In thin or low-float stocks, 300,000 forced buy-market orders have an outsized price impact.
Worked Example
In January 2021, GME traded near $20 with short interest exceeding 100% of the float. Retail investors bought massive volumes of weekly call options with $30, $40, $60, and $100 strikes — names far out of the money. As price climbed above $30, dealers who had sold those calls began delta-hedging by buying shares. Each price increase pushed additional strikes in-the-money, increasing delta across thousands of open interest contracts and forcing a new round of hedge buying. GME climbed from $20 to a peak of $483 in 10 trading sessions. The gamma squeeze mechanism — layered over a classic short squeeze — made the move self-sustaining until options expired and open interest collapsed.
When Traders Use This Concept
Traders screening for potential gamma squeeze setups look for:
- Short interest above 20% of float (adds short-squeeze co-amplifier)
- Unusual call options volume, particularly in short-dated, out-of-the-money strikes relative to average daily options volume
- Low float (under 50 million shares makes dealer hedging more price-impactful per contract)
- GEX (Gamma Exposure) in deep negative territory — meaning dealers are net short gamma
GEX, offered by platforms like SpotGamma and Cboe's LiveVol, aggregates the total dealer gamma position across all open interest for a ticker. A large negative GEX reading implies substantial required hedging flows if price moves higher. A GEX flip from negative to positive (dealers become long gamma as price exceeds concentrated strikes) acts as a natural squeeze ceiling — dealers become sellers on rallies rather than buyers.
Limitations and Common Misconceptions
Gamma squeezes are violent and brief. They unwind as fast as they develop: once weekly options expire, the hedging demand evaporates and the price driver disappears. Entering after the squeeze begins means buying at peak hedging pressure, not the start of it. Large market makers model their books holistically and frequently offset gamma from one name against another, dampening the feedback loop. Not every stock with elevated call volume develops a squeeze; the requisite combination of low float, concentrated open interest near specific strikes, and genuinely short dealer positioning must all be present simultaneously.