Gamma Squeeze Fundamental - The HOW and WHY Basics

Hi everybody! I’ve been seeing around trading floor chat that some folks are having trouble understanding the fundamentals of gamma and short squeezes; the HOW and WHY they happen. I’m hoping to clear up some of that confusion and do it in a very simple manner. I’m also hoping that this post can open a dialogue for others to correct and add input as necessary. Let’s get into it.


I’ll start with gamma because everyone has a close eye on ESSC at the moment, and it obviously has immense squeeze potential. There are a few terms I’ll need to define up front to make it easier to understand in the long run.

  1. Underlying - In regard to options trading, the underlying is the security that a derivative contract is structured around, most often a stock.
  2. Derivative - A contract that is valued based on the price of the underlying security. In regard to this write up, this refers solely to options contracts. Open interest refers to the volume of derivative (options, both calls and puts) contracts that are open on a given date.
  3. Delta - Delta is a ratio that compares the change in price of the underlying (see above) to the change in price of its derivative, in the case of the gamma squeeze, a call option. Delta will be a fraction in between 0 and 1 and increases the deeper in the money your call option is. (Remember this, it is key)
  4. Market Makers - A group of individuals, usually working with a brokerage firm, that create liquidity in the market by providing trading services. market makers make profit through the bid-ask spread, so they try to eliminate as much risk as possible while trading. They do this by hedging their trades.
  5. Hedging - Hedging is the main driving force of a gamma squeeze. In regard to this write up, hedging occurs when market makers buy shares of the underlying security they have previously sold call options for, decreasing their risk exposure. This is essentially insurance on their initial trade.

Now I’ll get into the mechanics of the gamma squeeze. The market maker sells some call options to retail traders like us. Once he does so, he is immediately exposed to risk, and remember, market makers hate being exposed to risk. In order to insure himself against the calls he sold, the market maker must buy shares of the underlying to hedge. This way he is protected should the price of the underlying increase, because he now owns shares that increase in value to counteract the lost value from the calls he has sold. The amount of shares he buys to hedge depends on the delta ratio of the call option he has sold. To put it simply, the higher the delta, the more hedging occurs (per contract: 0.15 delta = 15 shares, 0.50 delta = 50 shares, 1.00 delta = 100 shares). In most cases, this hedging doesn’t have much of an effect on the price of the underlying. Under special circumstances, however, (like in the case of ESSC’s insanely low free float) increased volatility in the underlying is enough to set off a chain reaction which becomes the gamma squeeze. With a surge of volatility and open interest from retail traders like us, the price of the underlying increases enough that cheap, out of the money options with very low delta and very high open interest become in the money. When this happens, the delta increases, market makers purchase more shares to hedge, and this in turn drives the underlying price up further. Then even higher strike options become in the money…

and you can see how it becomes a vicious cycle creating immense upward pressure on the stock. Ideally, the open interest in the option chain should be high across all strikes fairly equally, so that there is a nice smooth progression as each strike becomes in the money during the squeeze. This is called the “gamma ramp.” The rise in price is usually very fast, and it will very likely reverse just as quickly. This is why you must always take care to cover your cost basis on the way up, and try not to FOMO in late. I can speak from experience that it rarely works in your favor, and it can be catastrophic to your account. These plays come about fairly often, its better to just wait for the next opportunity!

When I first started researching squeezes, it was a little difficult for me to understand, and I wished I had a resource like this forum and discord to help. I hope this will help some people like that. I tried to keep it simple, short, and easy to understand. Over this weekend I will work on another write up for a short squeeze as well.

Enjoy your weekend folks, and let’s get hyphy for ESSC next week!


Nice write-up.

Something I’m gonna read/watch this weekend as well to understand more about options-driven stock movement:


Some notes as I’m watching, regarding hedging in options-driven movement.

  • MMs will first marry the seller of covered calls to traders buying calls. This would do nothing to move the stock. If the MMs cannot find enough covered call sellers to match with the buyers, then the MMs will take the position themselves as the seller.

  • Excessive call buying, i.e. retail traders going long on way too many calls, forces MMs to take the other side of the position and short the calls.

  • The MM has the option to do nothing or hedge. Typically MMs don’t like taking overnight positions and most of the calls were for at least one day or more, so they will hedge the position. When MMs short the calls, they hedge by buying shares of the underlying, and this drives the stock price up.
    Kevin commentary: I don’t understand what he’s saying here. Is the statement “MMs don’t like taking overnight positions” an explanation of why the MMs have to hedge? Charles started by saying they have the option to do nothing or hedge. Does this mean doing nothing is not an option for calls with 1 day or more? Can someone chime in here?

  • MMs during GME gamma squeeze were hedging and buying up the shares hoping for the call-buying to stop as the cost of buying becomes too high. However, this didn’t happen and the MMs were faced with a liquidity issue. It got to a point where the exchanges and regulators were aware that MMs were becoming illiquid and have to settle the trades and they need capital to do that, and they were spending their capital to cover their calls (hedging), so the buy button was turned off for retail buying for speculation, and was only allowed for MMs/hedge funds that were short GME to buy for de-risking.

There’s interesting commentary on the GME movement and shorting, but that doesn’t belong in this thread.

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If the MMs cannot find enough covered call sellers to match with the buyers

Note, anyone (with level 4 options trading and sufficient buying power to cover the maintenance requirements) can sell naked calls, retail is not restricted to only selling covered calls.

“MMs don’t like taking overnight positions” an explanation of why the MMs have to hedge? Charles started by saying they have the option to do nothing or hedge . Does this mean doing nothing is not an option for calls with 1 day or more? Can someone chime in here?

It’s about risk adversity. Market making is about making money off the bid/ask spread and transaction volume, not about directional plays. They can do nothing, it just exposes them to potentially more risk.


Very interesting video. The marriage of retail CC sellers to call buyers is something I had never thought of, but hearing it of course it makes total sense. I get the feeling that in the end the MMs goal is to be delta neutral as much as possible, so I just don’t see them taking on the risk and doing nothing to hedge the calls they have sold. I feel like they just want to remain neutral and rake in their profits on the bid-ask.

Side note, its funny how he calls GME “game stock.” lol.


Also an interesting post on the topic of hedging here: Reddit - Dive into anything

Makes a case that a good portion of the OI does not need to be hedged because

  • not all sellers are MMs
  • a portion of the OI is likely from people opening spreads, i.e. we do not know how much of the OI actually needs to be hedged by MMs

It’s a worthy and informative point, but for the ESSC setup in particular, the ITM OI (and upcoming ramp) for ESSC is still significant given the OI to float ratio even if only a portion of the OI needs to be hedged. And IRNT ran on a lesser setup.

@Conqueror offers his response to the post here: Reddit - Dive into anything


Received a podcast link with apparently an actual MM (Erik Swanson at Simplex Investments) talking about hedging and other activities of market making. It’s from u/Theta_God. Gonna give it a listen: Reddit - Dive into anything

YouTube link: Meet the Market Makers on the Other Side of Your Trade · Erik Swanson - YouTube


Thanks Kevin this is awesome!

I think a lot of people in this discord still don’t quite understand that the market makers aren’t out to beat you on your trade. Their main focus is mitigating risk and profiting from bid/ask and volatility. I think the “hedging, delta, risk, and profitability, etc.” section illustrates that point very well. Although, he does also admit that during extreme cases like a gamma squeeze, they can be over-exposed, and to me that shows that they will make attempts to either prevent a squeeze, or stop it once its begun. Hopefully we can spread this video around a bit.

I did like during the Gamestop section, from about 39 minutes in, he essentially admits that gamma squeezes are recognized by market makers, and that hedging may have played a role in driving GME’s share price rally.

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@Kevin, given what we saw with ESSC today and last month, do you think its possible for a setup to have too low of a float, and be too susceptible to selling pressure that severely damages the play?

You mean like what may have happened today? This was the concern I had at the back of my mind but I didn’t expect it to happen before an actual run.

Yes, it seems the consensus is that one whale sell off may have caused a cascade of stop loss triggers. Makes me wonder if there is a goldilocks spot in the free float size. Not too volatile, but just right. Like IRNT.

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Thanks @sparrow for linking this report about GME being a short squeeze and a gamma squeeze.

Upwards Gamma Squeeze with Put Options
Take a look starting on Page 41 of the report where it discusses the anatomy of a gamma squeeze and leading into how market makers hedging put options can contribute to an upwards gamma squeeze movement depending on the timing of the hedging (Lines 119 to 126).

To summarize, MMs must buy shares to hedge STO puts, and they’d short shares to hedge BTO puts. However, if the stock price goes up soon after, they must adjust their hedge to match. Depending on the timing of the hedging, this can lead to a short-term spike in stock price. Therefore, if MMs hedge the STO puts by buying shares and driving the price up and then cover their short position opened from an existing hedge in BTO puts, it can cause a quick gamma squeeze.

Line 125 says it best:

For example, market participants might initially short sell put options, causing market makers to hedge by buying shares and driving the share price up as a result. Due to that increase in the share price, other market makers might buy shares to rebalance preexisting short positions in the underlying shares opened to hedge purchases of put options. Taken together, these actions would apply upward pressure to the share price, at least temporarily, until the first group eventually rebalances its hedging by selling shares of stock, which would in turn apply downward pressure on the share price.

Examples of How Hedging Works
Start on Line 131. It’s quite interesting. Line 132 describes an example where delta-hedging does not have to occur immediately upon the option transaction, which is what Valhalla has been arguing about on Reddit during the dark ESSC days.

Calculating How Much Delta Hedging Has Occurred
Starting on Line 135 the report actually describes a method to calculate how much hedging has occurred. I am not able to understand this part well, but their assumptions seem to imply that market makers delta hedge within the same trading day or on the subsequent day (but not required to hedge immediately upon option transaction). For the purpose of their example, they attempted to compare delta hedging with daily trading volumes, which is actually something that @Conqueror and others talked about, i.e. it appeared that ESSC had not been hedged yet based on daily trading volumes and stock price action.


From @mcgriffcrimedog on the THCA thread

My issue with anything being gamma squeezed is that MM have adjusted the how they hedge delta. (personally I noticed the initial difference in hedging for MM’s when IRNT made a push at open then dumped.) With that being said it seems that low float spacs with options pumps to about 15 (so they are tradable) but after that it trades flat (cause that is where the money is theta eats away at them and then before expiration they get massively pushed below strikes)So what i notice is that MM’s are taking advantage of the T+1,2 settlement. The SEC approved back in April of 2021 the rule for compression hedging being able…

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It was proposed as a way to hedge indexed options, however on the bottom of page 32 they gave the ok for using it for Equities as well.

Multi lateral compression hedging has been utilized in derivitive markets by central banks and large instituitions to help with BASEL 3 compliance…

I do not think all equities are on the compression list. I think they are targeting certain ones, IE (tight float, memes, large option OI.) There is more to look at and I have some time into it but what I have gathered so far is that CME Group is the firm performing the hedge… It also is stated that it takes place on the Tuesday following the 3rd friday of the month (monthly options expiration dates)…

Example of compression hedge

So I also believe they are using PFOF (cant prove yet) to calculate cash hedging as well because fidelity, robinhood, webull, ( you have to have the ability to fund delivery or they sell out @3pm est on expiration.) Schwab will front on margin and maintenace call you… so the example is if they need to hedge 4,000,000 shares 1 million per broker, they can utilize PFOF to see they really only need 1 million for Schwabs contracts as those 3 can not fund the delivery DTE based on the PFOF information they have (or the brokers may request early)… Here is where it gets real unique lets say each of those firms has 250K shares already on the books now they do not hedge anything at all because the 1 million they need for schwab they can just borrow through the compression fund they all agreed to… where before they would each have to hedge 750K and have to buy when the contracts went ITM… since 3rd quarter last year no volume like that on things that have high OI/ITM…

These are the things I know for a fact so far since looking into this.

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@mcgriffcrimedog mentioned a few things on the trading floor on why the workings of a gamma squeeze might have changed, @wahoowa wanted to look into why SST ran and why others didn’t.

Like Mcgriff said: ‘‘This thread should be a group effort dive in for different opinions and perspectives… charts on the low floats with no ramp volume match to dates from cme etc.’’

This is not my specialty so I won’t be adding much.

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So I think the biggest reason that sst moved today and essc did not was the day essc began to run cause of sentiment, they came out with the exchange removal bullshit. (IMO that was it, killed it dead on the spot.) personally I think in a few months they will pay a fine for doing it while admitting they did nothing wrong, also they had option chain blocked from expanding, it was truly a different scenario but they did it when essc was to 26.00 if my memory is correct , but I’m old so could be off. Personally that is what happened compared to sst


So I think I may have found a way we can play these gamma squeezes and come out more consistently profitable but i’d love to hear other’s thoughts on this.

Something I’ve been noticing with SST and ESSC is that it seems like the better way to play it would be to play the 3rd week of OPEX instead of expecting a squeeze on the 4th. While I think it’s kinda tinfoiley, it is starting to seem like the MMs are knifing the stocks on monthly opex week.

Even potentially switching from calls into a short or put position on the 4th week to maximise gains.

3rd week is in the boxes, IBKR UI is boomer as fuck and i refuse to learn it.

SST 3rd week of March opex.

SST 3rd week of April opex.

ESSC 3rd week of Jan opex.

ESSC 3rd week of Dec opex.

and more recently, 3rd week of THCA April opex.


The_Ni posted about this podcast on another thread, here’s an episode speaking with an MM at Simplex which is pretty interesting has some mentions of hedging.

They actually talk about how he did very well during GME and AMC and how they benefit from the higher violitility and subsequent increase in the spread.