Short Gamma Squeeze

A short gamma squeeze occurs when market makers, who are net short gamma, are forced to buy the underlying asset as its price rises to maintain their delta-neutral hedge. This buying pressure further pushes the price up, which in turn forces them to buy even more, creating a self-reinforcing upward spiral.

This phenomenon is a significant source of volatility in both traditional and digital asset markets. It highlights the importance of market maker positioning in price discovery.

When a large number of call options are purchased, market makers sell these calls and must hedge by buying the underlying asset. If the price rallies, their delta becomes more positive, requiring further purchases.

This can lead to explosive price movements in a short period. Recognizing the conditions for a short gamma squeeze is a powerful tool for trend forecasting.