⚡ QUICK ANSWER: What is a Gamma Squeeze?
A Gamma Squeeze is a self-reinforcing market phenomenon where heavy call option buying forces market makers to aggressively buy underlying futures to maintain delta neutrality. As price rises, option deltas increase rapidly (measured by Gamma), forcing dealers to buy even more futures contracts and propelling explosive vertical price moves.
1. The Mechanics of a Gamma Squeeze
Gamma squeezes occur primarily when short-dated call options experience high volume spikes near major Call Walls:
- Call Buying Acceleration: Traders buy Out-of-the-Money (OTM) calls. Dealers sell the calls and short call delta.
- Mechanical Futures Buying: To hedge, dealers buy underlying NIFTY futures. This futures buying pushes spot price closer to the call strike.
- Delta Expansion Feedback Loop: As spot price approaches the strike, call delta surges toward 0.50 and 1.00. Dealers are forced to buy more futures, creating a violent upward feedback loop.
2. Volatility Collapse Crash Mechanics
Conversely, a Volatility Collapse Crash regime develops when spot breaks down through ZGL while India VIX spikes:
- Forced Short Put Hedging: Dealers short puts must sell futures into a dropping market as put deltas jump toward -1.00.
- VIX Expansion Panic: Rising VIX expands option premiums, increasing margin requirements and forcing automated liquidations.
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