Gamma Squeeze and Gamma Exposure: How Delta Hedging Moves the Market

The mechanics: delta hedging step by step

An upside gamma squeeze follows a recognisable sequence. It rests on one assumption: investors buy calls and market makers sell them. That is common in single stocks with speculative call buying, but it is not a rule; when dealers are the buyers of options, the effect reverses.

1. 1Demand for calls. Investors buy short-dated calls in size, often out of the money (OTM) and concentrated on a few strikes. Open interest at those strikes jumps.
2. 2First hedge. The market maker is short calls and therefore short delta. It buys shares matching the current delta of the contracts it sold.
3. 3The price approaches the strikes. The closer the stock gets to a strike and the less time is left, the higher the gamma. The calls’ delta rises quickly.
4. 4More buying. To stay delta-neutral, the market maker has to buy more shares. That demand arrives on top of the original buying.
5. 5Feedback. The extra buying lifts the price, which lifts delta, which forces more buying. As the calls gain value, some investors roll into higher strikes and the loop starts again one level up.
6. 6Break. Once call demand fades, the options expire or the price turns, delta falls and the hedges are sold. That is why prices often drop after a gamma squeeze as fast as they rose.

The same mechanism works on the way down. If dealers have sold puts in size, they are short gamma too. As the price falls, the puts’ delta becomes more negative and the dealer has to sell shares or short futures to offset it, which accelerates the decline. This side matters more for indices, where institutions buy puts for protection all the time.

Reading gamma exposure (GEX): gamma flip, call wall, put wall

Gamma exposure (net GEX) estimates how much gamma market makers hold in total, usually expressed as the dollar change in delta per 1% move in the underlying. The common approximation per strike is gamma × open interest × 100 × price² × 0.01. Calls are counted as positive, puts as negative, and all strikes are summed.

That rests on a strong assumption about positioning. The common model for indices assumes dealers are long gamma in calls (investors sell covered calls, for instance) and short gamma in puts (investors buy protection). In single stocks with speculative call buying it can be the exact opposite. Who actually holds which side is not visible in public data. GEX providers such as SpotGamma or SqueezeMetrics use their own assumptions and flow data, and their numbers can differ from each other.

GEX keeps moving: with the price, with time (the gamma of short-dated options near the money rises sharply) and with every large expiration, when part of the inventory simply disappears. After a big monthly expiry the picture can change overnight. Our guide on how to read an options chain shows where volume and open interest sit.

0DTE and expiration: why gamma explodes near the end

Gamma is highest for at-the-money options and rises as expiration approaches. An option with 90 days left reacts slowly; an option with one day left can swing from a delta of 0.2 to 0.8 on a small move. That is why 0DTE options (expiring the same day) on the S&P 500 play a growing role: they are hedged minute by minute, and large positions at one strike can influence the index’s intraday path.

Two side effects belong here. Charm is the change in delta from the passage of time alone, so hedges get adjusted during the day even when the price stands still. And at expiration gamma vanishes at once: positions that had to be hedged no longer exist, and the hedges are unwound. Read more about short expirations in our post on 0DTE options.

What options traders can do with this

• Don’t chase. By the time a squeeze is in the headlines, the calls are expensive: implied volatility is high and time is short. Buying now means paying a lot of time value that disappears quickly when the move fades.
• Define the risk. If you want exposure to a strong move, a bull call spread instead of a naked call lowers the cost and the dependence on IV. More in our guide to spreads.
• Don’t sell naked calls into a setup. A naked short call is short gamma with theoretically unlimited loss, and these are the phases in which that risk becomes real.
• Use GEX as context. In a positive-gamma environment ranges tend to hold, which suits premium strategies such as the iron condor. In negative gamma, wider strikes or smaller size make sense.
• Plan the exit before the entry. Gamma squeezes end abruptly. A fixed plan for taking profits and losses matters more than the perfect entry; see risk management.