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June
24
2021

Watch Live: Is This The Next Gamma Squeeze?
Tyler Durden

"Gamma Squeeze" has been the word of the year so far for many freshly-minted equity-trading gurus (as they watched their AMC, GME, and other meme stocks momentum ignited "to the moon" time and again in the first half of 2021).

To have a “gamma squeeze” there first needs to be a “delta squeeze”.

A sudden surge in call volumes can lead to options market makers (MM) having to purchase shares of stock, which can drive the stock price higher.

When new options positions are traded, MM may need to immediately hedge the risk generated by these new trades.

This initial hedge is called a “delta hedge” and can result in large amounts of stock being purchased. As the stock price moves around, MM may need to adjust their hedge positions, which is called a “gamma hedge”.

The “delta hedge” simply addresses new options trades, however its likely that MM have a substantial existing call position. Therefore as the stock rises, MM need to buy more shares to stay hedged on their existing position. This hedge adjustment is where “gamma” and the gamma squeeze comes into play.

As new call buyers come in and the stock price rises, MM have to buy more and more shares to control their risk exposure.

However, it is notable that while the most recent examples of gamma squeezes have been exemplified by these explosive moves to the upside, historically speaking, gamma squeezes have been primarily associated with markets dropping, not rising. 

This is because often as markets start to selloff, traders seek downside protection by purchasing put options. As traders buy puts, dealers (who are short those puts) must short stock to hedge themselves, further adding to the downward momentum driving a stock’s price lower. This ends up turning into a “reflexive” fear-based feedback loop (as opposed to the greed-based call buying gamma squeeze).

So who will be the next for a gamma squeeze (and will it be call- or put-driven?)

According to the SpotGamma Equity Hub, this is the next name that has the makings of another gamma squeeze. 

Find out what the name is and what to look out for in the next 24 hours here with Brent Kochuba (due to start at 12ET)...

Find out more about how options delta and gamma squeeze here

 

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