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Explaining Easy To Understand Gamma Squeeze

Mar. 13, 2021 3:32 PM ET
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Needle of suspicion points towards some traders

Keith Patrick Gill, a trading expert who is also known as Roaring Kitty on YouTube and Twitter, has become popular because of his posts on Reddit’s WallStreetBets (WSB). He is believed to be behind this sudden increase in the prices of the shares of GameStop. He will soon testify in front of Congress alongside the CEOs of several other companies and managers of Hedge funds. House Financial Service Committee of the Congress is trying to find out how some traders jacked up the prices of shares of GameStop by almost 1800% in two months that cost Wall Street nearly $19 billion.

Gamma Squeeze is a phenomenon where call buying by big traders leads to rapid increase in the prices of shares of a company. It sets a chain reaction in motion where traders indulge in more call buying and prices of the stock shoot up even more.

In the recent case of GameStop, some of the members on Reddit’s WSB egged on traders to buy call options of Game Stop at prices higher than at which its shares were trading in the market. Prices of GameStop shares started to increase, thereby fuelling more call buying from retail and other big traders. WSB has jacked up prices of shares of many other stocks in the same fashion, the more prominent of them being AMC Theaters and BlackBerry.

Only a handful gain, but a lot of them lose!

There are several hedge funds like Melvin Capital and Citron Research that have suffered massive losses because of Gamma Squeeze. If there are a few millionaires like Roaring Kitty that can be counted on fingers there are a lot of losers, especially amateurs, who do not have much idea of what Gamma Squeeze is and how it actually works.

A Gamma Squeeze is not a win-win situation for all kinds of investors. The skyrocketing prices of a particular share forces investors and brokers to go on a buying spree against their positions in the market. Gamma Squeeze can lead to massive losses for many investors and hence it is not advisable, especially if you are new to options trading. In fact, a few hedge funds that predicted a slump in the prices of shares of GameStop and placed huge bets on this prediction have admitted to suffering huge losses after prices of GameStop continued to rise.

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