Gamma Squeeze: How Option Hedging Can Push a Stock Up, and What the GameStop Evidence Shows

A gamma squeeze is a rise in a stock driven by option hedging: market makers who sold call options buy the stock to hedge them, and as the stock rises they need to buy more, which can push it higher still. The U.S. Securities and Exchange Commission (SEC) staff defines it as what "occurs when market makers purchase a stock to hedge the risk associated with writing call options on that stock, in turn putting further upward pressure on the underlying stock price." The mechanism is real, but it is often named after the fact without proof: in the best known case, GameStop in January 2021, SEC staff "did not find evidence of a gamma squeeze."

How a gamma squeeze works

Four pieces have to line up.

1. Traders buy call options in large numbers, often short-dated and near or above the current price. The SEC staff names this as "one of the main drivers of a gamma squeeze": "an influx of call option purchases, which causes market makers to hedge their writing of the call options by purchasing the underlying stock, driving up the stock price in the process" (SEC staff report, October 14, 2021).
2. Market makers sell those calls and hedge with shares. A short call has negative delta, so the hedge is to buy shares; see delta hedging.
3. Gamma makes the hedge grow as the stock rises. Delta changes as the stock moves; the rate of change is gamma. The Options Industry Council (OIC): short calls and short puts "will have negative Gamma", and "Gamma is higher for options that are at-the-money and closer to expiration" (OIC, gamma). A short call's delta grows more negative as the stock climbs, so the hedger must buy more shares into the rise.
4. The buying moves the price, if it is large compared with the stock's normal trading volume. That last condition is what turns a hedge into a squeeze, and it is the hardest to prove.

How much stock a hedger has to buy: a hypothetical

With 7 days left, a move from 95 to 105 would make the dealer buy about 850,000 shares (from 74,639 to 926,293). With one day left, almost the whole million is bought between 95 and 105, most of it around the strike: gamma at 100 is about 0.30 per share with one day left, against 0.12 with seven. This is why gamma squeezes are usually associated with short-dated options near the money. By 110 the dealer already holds almost the full million shares, so the buying from hedging runs out on its own. The chart above shows the same short call's delta and gamma at 30, 7 and 1 days.

Gamma squeeze vs short squeeze

The two are often mixed up because they can happen at the same time. The SEC staff describes a short squeeze as one that "might occur when an event triggers short sellers en masse to purchase shares to cover their short positions" (SEC staff report).

Short squeezes are covered in short covering, the infinity short squeeze and the biggest short squeezes in history. A move the other way, longs forced to sell, is a long squeeze.

GameStop, January 2021: what the SEC staff found

GameStop is often given as the textbook gamma squeeze. The SEC staff report on the episode, published October 14, 2021, says otherwise (SEC staff report):

AMC's rise of January 2021 is sometimes told as a gamma squeeze too. The SEC report records AMC's 301.2% one-day rise on January 27, 2021, but does not attribute it to a gamma squeeze, and we found no primary source that does. The same report puts GameStop's daily moves in perspective: that day, four other stocks rose more in one session than GME did on any single day, and "since 2020 began, 134 common stocks had at least one one-day price increase greater than GME's largest one-day price increase."

Can a gamma squeeze work downward?

The same logic runs in reverse with puts. A dealer who sold puts holds positive delta, as the OIC notes for short puts (OIC, delta), and hedges by selling shares short. As the stock falls the put's delta grows, so the dealer has to sell more into the decline. We found no source that compares the strength of this downward pressure with the upward case.

What this means for traders

Spotting a gamma squeeze in advance needs data a retail trader rarely has: who sold the options, and whether they hedge. Heavy call volume alone does not show it, as the GME case shows: the calls may be bought by the market makers themselves. How long a squeeze lasts is often asked; it depends on the expirations of the options involved, and we found no study measuring a typical duration. Buying short-dated calls in the hope of a squeeze risks the whole premium, and an option contract usually covers 100 shares (OIC, options basics). We have not tested any gamma squeeze signal; the site's test bench measures chart patterns, not option flows. The greeks behind the mechanism are summarized in the option greeks cheat sheet, and the time decay guide shows why short-dated options change so fast. More guides are in the options section.