What Is a Gamma Squeeze?

Add the complexity of options to the forced buying behavior of an ordinary short squeeze, and you can wind up with an even crazier situation

In investing, a «squeeze» typically refers to times when rapid price movements in a company’s stock force investors to make changes in their investment positions that they otherwise wouldn’t. Those forced moves often drive even more price changes and forced moves, creating a nasty feedback loop that can last quite awhile before it crashes.

One of the more common types of squeezes is known as a short squeeze — when a rising stock price forces people who had sold the stock short to buy back those shares, driving stock prices higher. Related to the short squeeze is something known as a gamma squeeze.

A gamma squeeze takes things one step further, forcing additional stock-buying activity due to open options positions on the underlying stock. A gamma squeeze is behind a large part of the recent meteoric rise in the share price of GameStop (NYSE:GME).

By The Motley Fool