Gamma Squeeze Mechanics

A gamma squeeze occurs when market makers, who have sold call options to traders, are forced to buy the underlying asset as the price rises to remain delta-neutral. This forced buying increases the price of the underlying asset, which in turn causes more call options to move into the money, requiring further hedging.

This creates a powerful feedback loop that can drive asset prices to extreme levels. In the cryptocurrency derivatives market, where leverage is high and retail participation is significant, gamma squeezes can lead to rapid, parabolic price moves.

This process is entirely dependent on the gamma of the options, which measures the rate of change of delta. As the price approaches the strike price of the options, gamma increases, forcing market makers to buy more aggressively.

Understanding this mechanic is crucial for traders monitoring options chains and their impact on spot prices. It is a classic example of how derivative market dynamics can dictate spot market volatility.