Gamma Squeeze vs Short Squeeze - Global Trading Software

Gamma Squeeze vs Short Squeeze: What’s The Difference?

When it comes to trading, the prices of stocks can suddenly change. This can be a good or a bad thing, depending on whether you’re buying or selling. But, in certain circumstances, traders are forced to make certain moves that’ll affect their profitability.

This is why you need to understand the differences between gamma squeeze vs short squeeze. Both involved sudden increases in pricing and potential losses for traders. But one has to do with trading options and the other with short-selling shares. Let’s discuss these short squeeze vs gamma squeeze differences further below.

What is a gamma squeeze?

When there’s a sudden increase in the price of an underlying security, this can lead to a gamma squeeze. In this case, options traders selling options (also known as “writing” options), experience a sudden increase in the price of the underlying security.

This increase causes the value of the options they have sold to decrease, resulting in potential losses for the traders.

A gamma squeeze happens if there’s a sudden change in market sentiment in the industry or related products. It can also happen if there’s an unexpected event that causes a sharp move in the underlying security’s price.

With the above in mind, we might as well also touch on delta squeeze vs gamma squeeze. The term “gamma” refers to the rate of change of an option’s delta with respect to the underlying asset’s price. The delta of an option represents how much the option’s price will change with a $1 move in the underlying asset’s price.

So, when there is a sharp move in the underlying security’s price, the delta of an option also changes. And when the delta of an option is high, the option is more sensitive to changes in the underlying security’s price. Hence, the name gamma squeeze.

What is a short squeeze?

In a short squeeze situation, traders who have shorted security have to buy back those shares at a higher price. This can be due to a sudden increase in demand for the security. Shortening, by the way, is selling shares you don’t own with the expectation of buying them back at a lower price.

This can happen when positive news or rumors about a company lead to a buying frenzy. This causes the stock’s price to rise and puts pressure on short sellers to cover their positions.

When the price of a stock is rising, short sellers must buy shares to close out their short positions. This buying activity can drive the price of the stock even higher, creating a “short squeeze”. The stock’s prices, therefore, rise sharply, forcing short sellers to cover their positions at a loss.

Short sellers will also cover their positions if the price of the stock is rising too quickly, and they are afraid of incurring even greater losses. Rumors, speculation and manipulation can cause a short squeeze. They can be a sign of a market bubble or an irrational exuberance.

Gamma squeeze vs short squeeze: What are the differences?

So, based on the above, the gamma vs short squeeze can be regarded as quite different. But to further illustrate this point in understanding what is a gamma squeeze vs short squeeze, let’s discuss the differences below.

Gamma Squeeze

The process of a gamma squeeze is as follows:

  • It occurs when options traders experience a sudden increase in the price of the underlying security.
  • The value of the options they have sold then decreases, resulting in potential losses for the traders.
  • A gamma squeeze can happen when there is a sudden change in market sentiment or an unexpected event.
  • The term “gamma” refers to the rate of change of an option’s delta with respect to the underlying asset’s price.

Short Squeeze:

On the other hand, a short squeeze…

  • Happens when traders who have shorted a security are forced to buy back those shares at a higher price due to a sudden increase in demand for the security.
  • It can happen when positive news or rumors about a company lead to a buying frenzy.
  • Puts pressure on short sellers to cover their positions.
  • Often regarded as a market phenomenon that can be caused by speculation and maybe even manipulation.
  • Can be a sign of a market bubble or an irrational exuberance.

In summary, a gamma squeeze is an options trading strategy where traders are affected by the sudden increase in the price of the underlying security. And a short squeeze is a trading strategy where traders who have shorted a security are forced to buy back those shares at a higher price. This is mainly due to a sudden increase in demand for the security.

How to trade a gamma and short squeeze?

Trading a gamma squeeze and short squeeze can be complex and risky, and it is not recommended for novice traders. Here are some strategies for trading a gamma squeeze and short squeeze:

Gamma Squeeze

  • Selling options: One way to potentially profit from a gamma squeeze is to sell options, such as call options. The hope is that the price of the underlying security does not rise as much as the options trader expects.
  • Buying options: If you expect a gamma squeeze to occur and you believe the underlying security’s price will rise, buy call options. This strategy can be profitable if the price of the underlying security rises more than the options trader expects.
  • Hedging: Another strategy to mitigate the risk of a gamma squeeze is to hedge your options positions using other securities or derivatives such as options.

Short Squeeze:

  • Going long: One way to potentially profit from a short squeeze is to go long on the stock that is experiencing the short squeeze. The goal is for the stock’s price to continue to rise and for short sellers to be forced to cover their positions.
  • Short selling: If you expect a short squeeze and you believe the underlying security’s price will fall, short sell the stock. This strategy can be profitable if the price of the underlying security falls more than the trader expects.
  • Hedging: Consider hedging your short position using other securities or derivatives, such as options.

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