Gamma Squeeze Explained – [Impact, Risks, and Volatility]

In day trading and options trading, prices of assets can more extremely quickly with extreme levels of volatility. Certain types of stocks can have erratic price behavior in a short period. This can leave investors and traders confused and oftentimes burned. However, there is more going on behind the scenes that traders need to understand so they can be on the right side of the trade. When the price of a stock moves quickly to the upside it can experience a market phenomenon knowns as a gamma squeeze.

We will discuss the intricacies of a gamma squeeze and deconstruct how it works so you have a better understanding to manage your risk more effectively. One thing is certain, you don’t want to get yourself on the wrong side of a gamma squeeze.


  • A gamma squeeze occurs when the volatility in the stock goes up and causes a surge in the price to the upside
  • It occurs for a short period following a large news release that causes high levels of volatility in the price of the stock

What is a Gamma Squeeze?

To fully understand how a gamma squeeze works it’s important to understand the mechanics of gamma in options trading first. A gamma squeeze occurs when there is a disproportionate amount of trading volume in one direction (usually the long side) in a short period. When a flurry of orders overwhelms the market in a specific security at a high frequency and volume, it can push market makers to fully buy out or liquidate their existing positions. When market makers buy or sell out of their positions, this causes a spike in the price of the stock.

A gamma squeeze is a short-term event and does not sustain over long periods. It’s worth noting that a gamma squeeze is not directly caused by traders. Instead it is heavily influenced by the rate at which market makers liquidate their underlying position in a given security.

Events that push market makers to liquidate their positions are primarily news events such as:

  • Company-specific earnings releases
  • Inflation news releases
  • Interest rate announcements
  • Unexpected company news

These are high volatility events that tend to push stock trading volumes higher and in turn cause market makers to liquidate positions at a higher rate.

What Does a Gamma Squeeze Look Like?

To get a better understanding of what a gamma squeeze looks like, it’s important to first know the impact of the trading volume. Trading volume represents the daily amount of shares being traded back and forth for a given stock. Stocks also have a daily average trading volume.

When a gamma squeeze occurs, the daily trading volume trades significantly higher than its daily average. This is one of the first metrics to look out for when looking for a gamma squeeze.

gamma squeeze
GameStop – Image Courtesy of

GameStop Gamma Squeeze Example

The GameStop saga is the perfect combination of a gamma squeeze and a short squeeze into one. However, the two are different and it’s important to make the distinction.

Gamma Squeeze vs Short Squeeze

Although a gamma squeeze is very similar to a short squeeze, there are some important distinctions between the two.

For starters, a short squeeze is caused by massive retail and institutional volume. Whereas a gamma squeeze is caused by the market maker. A gamma squeeze occurs due to highly volatile price movements in the stock along with large trading volume. This combination forces market makers to exit their trades and as a result, it causes a large surge in the price of the stock to the upside. Gamma squeezes are very common with specific stock gaps like a breakaway gap.

gamma squeeze vs short squeeze
gamma squeeze vs short squeeze

A short squeeze behaves similarly to a gamma squeeze but is the result of other traders liquidating their short positions and buying back shares that they borrowed. This is known as “short covering”. Short squeezes force traders out of their positions due to either stops getting hit, margin calls, or by their own accord. Covering their short position causes them to buy back shares and as result, this mechanism pushes the stock price higher.

Short squeezes can cause the price of a stock to surge in a short period of time.

How Stock Float Impacts Squeezes

An important element of a gamma squeeze, as well as a short squeeze, is the float of the stock. Stocks with a low float (total shares available for trading) tend to have a higher volatility skew. If you are day trading stock with a lower market map and a low float, it’s important to be aware that the stock can have a very sensitive price. In addition, it’s important to pay attention to the short interest of the stock because it can also impact a short squeeze.

This is because it will take a low amount of retail and institutional volume to move the price of the stock. As such, some stocks have a higher gamma and short squeeze sensitivity.

Below is our float sensitivity chart that can give you a better idea of the sensitivity levels of stocks at different levels of float.

How to Spot a Gamma Squeeze

Below is a step-by-step process you can use to identify a gamma squeeze. This takes some patience and an ability to read and interpret a stock options chain. 

 Things We Need 

  • The first thing you need is a lot of options trading activity. This activity will typically be for call options, however, gamma squeezes can also happen to the downside. 
  • Next, we need some sort of catalyst that will cause movement in the price of the stock, such as company news or earnings releases. The catalyst will get the stock moving and give it some momentum to start the gamma squeeze. 
  • An increasing rate of a call options value. This means that there are more retail investors purchasing call options causing purchasing of call options to also increase. This naturally pushes market makers to hedge the call options they are selling by purchasing shares.

What to Look For

  • Open Interest – Check the open interest at key levels on the weekly and monthly call options. This will be made available to you by your broker. You want to look for high levels of open interest to find a stock that will be susceptible to a gamma squeeze. 
  • Your Catalyst – Some sort of news event that will impact the price of the stock. 
  • Look for a stock that is moving consistently higher to the upside.

How To Trade a Gamma Squeeze

Trading a gamma squeeze will depend on if you’re a long-term investor or a short-term trader. If you’re a long-term investor that has a 2-5 year time horizon, there’s no point to chase the squeeze. However, if you’re a short-term trader it makes more sense.

A great strategy to trade a gamma squeeze is by using a covered call. A covered call allows you to take advantage of the price appreciation along with the higher premiums on the call options. You make money on the underlying shares as well as selling an out-of-the-money call option against the underlying stock position.

How Long Does a Gamma Squeeze Last?

A gamma squeeze can last 1 day or it can last several days. There are a lot of factors in play like how many people are buying the stock, how the options market is moving, how many people are taking profits along the way, and so forth. It just depends on the activity and the public interest in the stock.

Gamma Squeeze Risks

As a trader who plans to add this strategy to their trading arsenal, it’s important to keep a close eye on the open interest. The open interest does change and can pose some risks if you don’t know how to interpret it correctly. Below are some of the common risks associated with a gamma squeeze.

  • Timing difficulty. A gamma squeeze can be very difficult to time due to its short-term temporary nature.
  • Knowledge risk. Most traders don’t know how to accurately identify when a gamma squeeze is happening and can often misinterpret the move and get on the wrong side of the trade.
  • Technical risk. Another thing that is important to know is the key technical levels at which the stock is trading. If you aren’t aware of how these can impact the price of the stock you can end up mistiming your trade and getting on the wrong end of it.
  • Volatility Risk. When a gamma squeeze happens it is often a very volatile event that causes a massive surge in the price of the stock. Traders can have difficulty in determining when the squeeze is actually over and hold on to the trade for much longer.

Due to these risks, we highly recommend learning how to accurately interpret when a gamma squeezing is occurring so you don’t lose money on your trades.


Learning the factors that influence a gamma squeeze is the first important step in identifying when it occurs. Using past examples like the AMC and GameStop squeezes can help you understand the mechanics behind how they work. As always, practice caution with highly complicate strategies like this one and know the underlying risks.