Understanding Gamma Squeezes
A gamma squeeze occurs when a stock's price rises rapidly due to the hedging activity of options market makers. As the price of a stock increases, more call options go into the money. To remain delta neutral, market makers who sold those calls must purchase the underlying stock, which can lead to a positive feedback loop, pushing the price even higher. This guide provides an overview of how these dynamics play out and impact stock valuations.
Worked Example: These Figures Today
The companies used as examples above, with the current figures behind them. Illustrations of the metric — not a ranking, not a shortlist, and not a recommendation.
| Ticker | Company | Price | Change | Market Cap | MoonshotScore |
|---|---|---|---|---|---|
| GME | GameStop Corp. | $23.90 | -3.71% | $12.1B | 70 |
| AMC | AMC Entertainment Holdings, Inc. | $2.89 | -0.34% | $2.6B | — |
| TSLA | Tesla, Inc. | $391.62 | +5.21% | $1.5T | 57 |
Shortlist Context
The following shortlist includes stocks that have, at times, exhibited characteristics associated with gamma squeezes based on past market dynamics. However, it is important to note that the market conditions and specific factors that contribute to a gamma squeeze can change rapidly. This is not a buy list. Conduct thorough due diligence and consider current market conditions before making any investment decisions. Stocks like GME and AMC have previously experienced significant price volatility related to option trading.
Delta neutral refers to a portfolio strategy where the overall delta (sensitivity to price changes in the underlying asset) is zero. Market makers aim to maintain delta neutrality to hedge their positions, buying or selling the underlying stock as the price fluctuates to offset potential losses from their options positions.
High short interest can amplify a gamma squeeze. As call options push the stock price higher, short sellers may be forced to cover their positions by buying back shares. This additional buying pressure can accelerate the upward price movement, intensifying the squeeze.
Trading gamma squeezes involves significant risks. The rapid price increases can be followed by equally rapid declines, potentially leading to substantial losses. The dynamics of a gamma squeeze can change quickly, making it difficult to predict the duration and magnitude of the price movement. Proper risk management is essential.
For more information, explore our guide covering options trading basics.
“MoonshotScore rates a US-listed stock 0 to 100 using five sector-relative pillars. Higher means stronger numbers across business quality, safety, valuation, growth and momentum. Eligible common stocks and ADRs only; funds, ETFs, warrants, units, SPACs, preferreds, and notes carry none. It is built for education and deeper due diligence, not financial advice.”
Questions worth resolving before acting on the screen
What is 'delta neutral'?
Review the underlying financial statements and risk factors before making any decision.
How can high short interest affect a gamma squeeze?
Review the underlying financial statements and risk factors before making any decision.
What are the risks of trading gamma squeezes?
Review the underlying financial statements and risk factors before making any decision.
Where can I learn more about options trading?
Review the underlying financial statements and risk factors before making any decision.