When dealer hedging stops absorbing a rally and starts buying into it, and how to tell whether the book is set up for one.
A market maker who sells a call is short gamma on that strike. Being short gamma means their delta moves against them as the underlying moves: as price rises, their position becomes more short, and to stay neutral they must buy. The buying is not a view. It is the hedge, and it gets larger the further price travels.
If dealers are net long gamma, the same logic runs the other way: they sell into strength and buy into weakness, which absorbs a rally rather than feeding it. So a squeeze is not simply a matter of heavy call open interest. It needs the aggregate book to be short gamma over the range price is travelling through, and the level where that changes is the gamma flip.
Two things compound it. Gamma itself rises as price approaches a strike and as expiry nears, so the hedge per point grows exactly when price is moving fastest. And a rally that lifts implied volatility pulls vanna in alongside gamma, which adds a second mechanical buyer. That is the configuration behind the moves that look like they came from nothing.
The honest version of this is a statement about range, not direction: a short-gamma book says moves are more likely to extend than to mean-revert, in either direction. It does not say a rally is coming. Nothing on this page has been measured walk-forward in this product, and gamma at a strike is partly endogenous to price, so "the strike pulled price" may have the causality backwards.
Dealers who have sold call options are short gamma above the strikes they sold. To stay delta-neutral as price rises they have to buy the underlying, and the higher it goes the more they have to buy. That buying is price-insensitive and mechanical, so it lifts price further and forces more of itself. The squeeze is the feedback loop, not the rally.
No. A short squeeze is short sellers of the stock covering. A gamma squeeze is option market makers hedging. They often happen together, because the conditions overlap, but the forced buyer is a different party and the trigger is a different instrument.
The precondition is the sign of aggregate dealer gamma, not the size of any single strike. While net gamma is positive, dealer hedging leans against a rally and absorbs it. The squeeze needs the book in negative gamma, which is what the gamma flip level marks. The live block on this page shows which side of it the current session is on.
The same mechanism runs in reverse. Hedging that bought on the way up sells on the way down, so a move made of forced buying unwinds into forced selling once it turns. This is why the condition is worth reading as a statement about range rather than as a reason to buy.
Dealer gamma across the expiry curve, and a written read every session.
CREATE A FREE ACCOUNT, NO CARD