How Long Does A Gamma Squeeze Last?

The “gamma squeeze” made big headlines in 2021, as Reddit’s self-proclaimed “apes” rushed to squeeze hedge funds out of heavily shorted stocks. Both GameStop Corp. (NYSE:GME) and AMC Entertainment Holdings Inc (NYSE:AMC) led the charge, but gamma squeezes aren’t new to Wall Street.

If you’re going to invest in the market (especially in these risky stocks), you would do well to understand “what is a gamma squeeze” and how to spot one.

It’s a dangerous game and only recommended for advanced investors. But it’s impossible to ignore the effects of these short squeezes on other investments held by these funds. You could get caught up in one without even realizing it if you’re not careful.

What Is a Short Squeeze?

The first quarter of 2021 kickstarted a frenzy of retail investors self-organizing on forums like Reddit and Discord to invest in larger numbers. It created a culture where these groups could affect a stock just like any major institutional investor. And thy quickly weaponized advanced trading techniques, like the short squeeze.

Short sellers exercise a trading strategy in which they borrow shares of a stock in order to sell them immediately. They are then short the value of those stocks, and as the price of the underlying stock decreases, the short option becomes more valuable. Often, these shorts sellers pressure share prices lower.

Because these shorts have theoretically unlimited risk when shares rise in value, self-proclaimed “apes” at Reddit can target heavily shorted stocks by snapping up shares en masse, thereby creating share prices to rise.

It also forces short sellers to buy their shares back at a loss, because the price rises higher than they sold them for originally. Those forced buys can further drive the price up, and as momentum builds, a gamma squeeze becomes possible.

How Does a Gamma Squeeze Work?

In a gamma squeeze, market makers are forced to deliver the underlying stocks and must buy at any price available.

Here’s how it works in a nutshell. When a traders buys a call option, a market maker must take the other side of the trade, so they are now considered short a call (a bearish stance).

But a market maker doesn’t want to take a view on the market one way or the other, they prefer to remain neutral.

So to hedge their short call position, the market maker buys shares of the underlying stock. 

When a short squeeze occurs, and share prices rise, market makers are forced to buy more shares to cover the exposure to the short calls. The higher the price goes the more shares they need to buy.

Soon momentum to the upside spirals to exorbitant levels which is referred to as a gamma squeeze.

Gamma squeezes can happen both ways, and a gamma-induced selling spree happens as a stock price plummets. Many retail investors believe hedge funds used this method to artificially depress the stocks of these two companies. That’s what caused the rally to turn the tide, but we still need to understand why they’re called gamma squeezes in the first place.

Let’s dive into that next.

Why Is It Called a Gamma Squeeze?

Stock market technical analysts watch various indicators in the charts to determine how an investment is performing. One is known colloquially as “the Greeks,” – these are metrics used to price options.

There are different Greek letters – including Delta, Gamma, Theta, Vega, and Rho – which measure different factors affecting an option contract’s value.

Delta measures how fast the option moves relative to a dollar move in the underlying stock. A delta of 0.50 means the a call option rises by $0.50 when an option rises by $1.

Gamma measures the rate of the Delta’s change.

By this measurement, Delta is the speed, while Gamma is the acceleration. (For the mathematicians, delta is the first derivative and gamma the second derivative).

Each Delta is a stagnant number for a specific price and time, while the Gamma measures the difference between Deltas over set periods of time. 

In a Gamma squeeze, as more call options are bought, market makers must buy ever more shares of the underlying stock. This pushes the Gamma to a large number, thus squeezing it while short sellers fall off, as in the case of 2021’s Reddit- and Discord-backed short squeeze. But how long can this phenomenon last?

How Long Does A Gamma Squeeze Last?

A Gamma squeeze can last for days, weeks, or even more, so it’s important to time your investments right. The last thing you want is to be on the wrong end of a Gamma squeeze buying high and selling low. 

It’s not a linear path either – both AMC and GameStop had huge spikes that included a large price hike followed by the price quickly deflating. This left many investors holding the short end of the stick, but this isn’t the first time it has happened.

In fact, the short squeeze and gamma squeeze are commonly used by institutional investors against each other, and there are many famous short squeezes throughout Wall Street’s history. In fact, this recent squeeze is not the biggest of all time.

What Is the Biggest Short Squeeze Ever?

The biggest short squeeze of all time happened to Piggly Wiggly in 1923. This Tennessee-based grocery chain started in 1916, and it was heavily shorted seven years later. This prompted founder Clarence Saunders to spend his own money (along with $10 million raised from a group of bankers) to buy all available stock and push the price up 50 percent.

By March of that year, he owned all but 1128 of the company’s outstanding shares and called on short sellers. This triggered the New York Stock Exchange to suspend trading and ultimately permanently delist the stock. 

In the end, Saunders had complete control of Piggly Wiggly, but it came at the price of millions of dollars in debt. He then couldn’t raise funds through selling public stock shares, leading him to file for bankruptcy protection.

How to Spot a Gamma Squeeze

A Gamma squeeze only typically happens during extraordinary events. Often, it’s because a wealthy person or group is looking to control a company, but in the case of Reddit’s rally, they sought heavily shorted stocks.

Shorted stock options are published monthly, and these reports can be used to find stocks that have too many shorts compared to outstanding shares. They then use online forums to organize, and keep up with these types of moves (along with watching the Greeks) in order to identify the best possible short-squeeze candidates.

And of course, a gamma squeeze doesn’t happen in every short squeeze. When it does, it’s unpredictable. AMC took longer than GME to hit the Gamma squeeze, even with the same crowd focused on both.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.