Trading the US market
Gamma squeeze
Definition
A related idea: heavy call option buying leads the dealers who sold those calls to buy shares as a hedge, adding to a rise. The SEC staff report did not find evidence of one in the main stock it studied.
Example
Say traders buy 2,000 call contracts on a $50 stock, covering 200,000 shares, and the dealers who sold them hedge with shares. At a delta of 0.30 the hedge is 60,000 shares; if the stock rises and delta climbs to 0.60, the dealers need 120,000, so they buy 60,000 more as the price goes up. That extra buying feeding the rise is the loop a gamma squeeze refers to.
Hypothetical numbers, for illustration only.
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