A rally amplified by market makers buying stock to hedge the call options they sold, as rising prices increase the calls' delta.
When traders buy large volumes of out-of-the-money calls, market-makers who sell them hedge by buying shares. As the stock rises, the calls' delta increases (gamma), so the market makers must buy more. That buying pushes the stock up, which raises delta again.
A gamma squeeze can compound a short-squeeze. It unwinds just as mechanically when the calls expire or the stock falls.
Example: heavy buying of $50 calls on a $40 stock forces market makers to buy 200,000 shares as it climbs to $48, an amount that in a thin float is itself the rally.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Bollinger bands: squeeze and expansion. The middle line is a 20-day average and the outer bands sit a set number of standard deviations away, so they measure how far price has recently been straying. When moves are small the bands pinch together; when moves grow they spread apart.Delta across the range of prices. Delta says how much a call's price moves for a one-point move in the stock. Far below the strike it is near 0 and the option barely reacts; at the strike it is about 0.50; far above it approaches 1 and tracks the stock.
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