Gamma Squeezes

A gamma squeeze is a market phenomenon where the rapid buying of call options forces market makers to hedge their positions by buying the underlying asset. Market makers who sell these call options are typically short gamma, meaning their risk increases as the asset price rises.

To remain delta-neutral, they must purchase more of the underlying asset as it approaches the strike price. This creates upward pressure on the spot price, which causes more call options to become in-the-money, necessitating further hedging purchases.

This cycle can drive the asset price significantly higher in a short period. It is a critical concept in options trading and reflects the mechanical influence of derivative hedging on spot prices.