gamma squeeze: What happens when stock prices shoot up because of Gamma Squeeze
In gamma squeeze, the price of a stock quickly increases based on traders buying many Call options to drive up the prices of select stocks due to option sellers needing to hedge their trades on the underlying stocks. Thus, a gamma squeeze can happen when there’s widespread buying activity of short-dated Call options in a particular stock.
Gamma is an investment term associated with the Greeks. Such terms are used to describe various positions when trading options. Gamma and delta, along with the others, can be used together to design a strategy to bet on a stock’s future price movement. To note,
is the rate of change of options price for every change in the underlying stock price. Delta is a linear function, meaning it will not change proportionately with a stock price. Whereas gamma refers to the rate of the change of the delta. As the delta value moves up or down, its respective curves and option market makers buy or sell options to maintain their hedges.
Traders are keenly watching out for the gamma squeeze after recent wild moves in the market. As stock prices soared, traders who had sold the options, have to cover their positions, resulting in a gamma squeeze.
Gamma squeeze is not the only factor pushing the market higher, but it may be one of the factors. A gamma squeeze could be an opportunity for investors, but it can also be risky depending on what’s driving a short squeeze to trigger the gamma squeeze. They can last for days or weeks. So, timing plays an important part in determining whether a gamma squeeze results in a profit or a loss for your trade. On the flip side, once a gamma squeeze reaches its peak, price reversals may happen so fast that a trader may see a steep decline in stock prices.
(DK Aggarwal is the CMD of SMC Investment and Advisors)
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