Gamma Squeeze Explained: Why GameStop Went Berserk

Ever wonder why GameStop stock moved 20%+ in a single day? Blame it on a gamma squeeze—a market phenomenon that’s becoming more common on Wall Street.

The Basic Setup

Gamma squeezes happen when a stock rallies fast because of how options market makers hedge their positions. To get it, you need to understand options Greeks—specifically delta and gamma.

Delta = How much an option’s price moves when the stock moves $1. Think of it like your car’s speedometer reading.

Gamma = How fast delta changes. If your speedometer goes from 40 to 50 MPH, your gamma is 10—that’s the acceleration.

How It Actually Goes Down: The GameStop Case Study

A gamma squeeze has a simple recipe:

Step 1: Call Options Flood In

Retail traders (mostly from the r/WallStreetBets Reddit community) started buying tons of out-of-the-money call options on GME. These are essentially bets that the stock will skyrocket. The goal? Exploit an existing short squeeze and amplify it.

Step 2: Market Makers Get Forced to Buy

When a market maker sells you a call option, they’re on the hook if the stock rises. To protect themselves, they buy actual shares of the stock as a hedge. The more calls people buy, the more shares market makers have to purchase.

In GME’s case, this was turbo-charged because traders were buying 0DTE options (expiring same day) and calls way out-of-the-money. Market makers had to accumulate massive share positions.

Step 3: The Feedback Loop Kicks In

Market makers buying shares → Stock price rises → Delta increases → Market makers buy even MORE shares to hedge → Price rises more → Repeat.

It’s a self-reinforcing loop that creates explosive price action detached from any company fundamentals.

Why 2021 GME Was Peak Chaos

Three perfect storms collided:

1. Retail had cash to burn: COVID stimulus checks filled trading accounts
2. Commissions died: Robinhood made zero-commission trading mainstream
3. Social media fuel: Posts from “Roaring Kitty” Keith Gill could move GME 20%+

Why You Should Be Careful

Gamma squeezes look like free money—until they don’t.

• Volatility goes insane: Price gaps overnight, no time to react
• You’re not in control: A celebrity trader’s tweet or an exchange halt can wipe you out
• They don’t last: Like musical chairs, latecomers get crushed when reality hits and the stock crashes
• Fundamentals disappear: You’re betting on momentum, not business value

The Bottom Line

Gamma squeezes are real and increasingly common. But they’re traps for most traders. Unless you’re a professional with iron discipline, the safest play is watching from the sidelines—not trying to catch the wave.