What Is a Gamma Squeeze? [2022 Ultimate Guide]

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Considering the perpetual interest in the stock market, it’s no wonder that many have asked themselves: What is a gamma squeeze?

If you find this aspect of forex trading a bit tricky to comprehend, this article has got you covered. Read on for everything you need to know about gamma squeeze to help you get started successfully.

What Is a Gamma Squeeze?

A gamma squeeze occurs when a company’s stock price falls below its book value. This happens because investors are concerned about their business prospects so they sell their shares, driving down share prices. If you own any companies that have experienced this phenomenon, it’s essential to keep an eye on your portfolio to avoid losing money.

We try having gamma squeeze explained to help you find out more information about how it works and which stocks are at risk of experiencing it so that you can make informed decisions about your investments.

What Causes a Gamma Squeeze?

A gamma squeeze happens due to rapid shifts in the underlying stock price, changing stock positions as a result. When enough investors have bought shares at a particular value, if there is any big news that would drive down its value or make it look less promising, those who aren’t able to sell their stocks before losing too much money will feel the pressure to do so as quickly as possible. This causes the price to drop even further, and the cycle continues until it eventually reaches a point where there is little change.

Gammas can be very dangerous, but they can also provide opportunities for those who know how to take advantage of them. For example, if you believe that your stock will drop in value soon, gamma squeezes allow you to sell it first and purchase it later at a lower price.

What Does Gamma Mean in Options?

In options, gamma is the rate of change between the option’s delta and the price of the underlying asset. It’s usually expressed as a percentage, and it tells you how sensitive the option is to changes in the stock price.

A gamma short squeeze is a situation where the gamma of an options position becomes so large that the holder must buy or sell the underlying security, sustaining significant losses.

A reverse gamma squeeze is the opposite of a regular gamma squeeze, occurring when an options position experiences a delta increase, forcing the owner to buy or sell the stock at unfavorable prices, resulting in significant losses.

Do They Happen Naturally or Artificially?

Gamma squeezes are an inherent part of the stock market, and they can happen naturally. For example, if a company has been performing poorly, and its stock price reflects this, it is more likely to experience a gamma squeeze because the traders who own these stocks will be eager to get rid of them as quickly as possible before losing any more money on them since you can never know for sure how long does a gamma squeeze last.

However, gammas squeezes can also be artificially created by hedge fund managers who manipulate the market by buying many shares in a company and then selling them quickly when they see that the price is dropping, causing the stock price to plummet further.

Gamma squeezes also take place in the world of crypto like Bitcoin, but you can avoid them with the best bitcoin trading platform.

Did You Know: If you’re looking for the best robo-advisor for options traders, Wealthfront offers a wide variety of features perfect for those who want to invest in options, with an excellent customer service team always available to help.

Key Takeaways

Gamma squeezes occur due to changes in the underlying stock price.
Although they can be very dangerous, gamma squeezes can also be favorable to those who know how to use them to make a profit.
Gamma squeezes are a natural part of the stock market.
Gamma squeezes can occur in cryptocurrency exchanges as well.

Gamma Squeeze Example

Many famous companies have seen swift movements when their stock prices suffered a significant drop, and they could all be at risk of experiencing another squeeze in the near future. Here are a few such examples to keep an eye on if you’re investing:

AMC

AMC experienced a gamma squeeze that occurred when the stock price fell to $14.24 after initially rising over 70% in 2016. This was caused by unfavorable reviews of its latest movie release and concerns about declining membership for its streaming service (which they’ve since fixed).

Gamestop

Another famous gamma squeeze example is Gamestop, whose stock price fell below its book value, and continued to do so for the next few months, most likely due to the increasing popularity of digital downloads and streaming services which caused a decline in sales for video game retailers.

Tesla

In June 2017, Tesla’s stock prices dropped by over 20% when news about a fatal crash involving one of its cars was released.

Netflix

In 2016, Netflix experienced a gamma squeeze that caused its price to drop by over 20% after announcing significant price increases for their subscriptions, to which many people reacted negatively.

Amazon

In October 2015, Amazon faced a gamma short squeeze after announcing plans to acquire Whole Foods Market, which caused the prices to fall dramatically due to a lot of concern among investors about how it would affect both companies, resulting in significant losses for shareholders.

Is Gamma Squeeze Good or Bad for Investors?

The spikes and dips of gamma squeezes can be both good and bad for a company. Although they can help investors make a profit quickly and easily, gamma squeezes can be very dangerous if you aren’t prepared to take advantage of them. If you feel like your stock could drop suddenly due to a gamma squeeze, you should be prepared to take action and sell your shares as quickly as possible to avoid losing money or even getting margin calls, which means that the broker will automatically sell your shares to prevent you from losing even more.

Depending on whether it’s a gamma squeeze vs a short squeeze, gamma squeezes can occur as the result of negative news or events. For example, if a stock price falls after a company announces poor earnings, this could indicate that the company is in trouble and might not be able to recover.

How Can You Avoid Getting Squeezed?

You can protect yourself from gamma squeezes by having a reasonable risk tolerance and being aware of the stocks at risk. You can do this by keeping track of the news and watching for any sudden changes in a company’s stock price.

It’s also important to keep an eye on large trading volumes in a company. If there’s a sudden increase, it could be because someone has bought up all of their shares, and they’re now selling them off quickly to drive down prices before anyone else can do anything about it.

Did You Know: A gamma squeeze can occur as the result of widespread speculation about the stock price’s direction.

Conclusion

Whether you’re already investing in the stock market, or planning to start doing so in the future, it’s a good idea to inform yourself about the potential risk of gamma squeezes. Hopefully, this article has been able to give you some insight into what gamma squeeze is, how it can affect your stocks, and what you can do to avoid getting squeezed.

FAQ

What triggers a gamma squeeze?

A gamma squeeze can be caused by many different things, including news events, earnings reports, and even rumors, so it’s essential to watch for any sudden changes in a company’s stock price and sell your shares quickly if needed.

What is the gamma of a stock?

The gamma of a stock is the rate at which its delta changes in relation to the underlying security. Gamma squeezes are pretty common in options trading and can be used to hedge positions while simultaneously generating some income.

How long do gamma squeezes last?

A gamma squeeze can last anywhere from a few hours to several days or weeks.

What is a gamma squeeze vs. a short squeeze?

In order to know what is a gamma squeeze, you should differentiate it from a short squeeze. While a gamma squeeze occurs when a stock price falls suddenly due to an increase in the supply of shares, a short squeeze happens when a stock price rises suddenly due to a higher demand for shares.

Sources

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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