Gamma Squeeze: Feedback Loops in Index Options
How dealer hedging and concentrated gamma can amplify Nifty and Bank Nifty moves — and why squeezes end abruptly.
Mechanism
A gamma squeeze occurs when option dealers must hedge rapidly — buying futures as spot rises (or selling as it falls) — amplifying the move. Heavy call OI with dealers short gamma can fuel sharp rallies as each uptick forces more buying.
The effect is strongest near expiry with ATM gamma concentration.
Recognition
Signals include accelerating trend with rising volume, spot jumping through strikes with large call OI, and whipsaw candles late in expiry sessions. Open interest may fall on calls as shorts cover violently.
Not every rally is a squeeze — sustained trends with OI buildup differ structurally.
Trading Caution
Chasing mid-squeeze with OTM calls risks buying the snap-back. Fading without confirmation invites being run over. Let structure confirm exhaustion — volume climax, reversal patterns, OI stabilisation.
Bank Nifty's higher beta produces more dramatic squeeze profiles than Nifty.
Frequently Asked Questions
- Can gamma squeeze work downward?
- Yes — put-heavy books with dealers short gamma can accelerate selloffs.
- How long do squeezes last?
- Often minutes to hours. They exhaust when hedging flow completes.
Key Takeaways
- Dealer hedging can amplify moves near high-gamma strikes.
- Common near expiry with concentrated OI.
- Chasing late squeeze entries is high risk.
Related Articles
- Gamma: When Delta Moves FastGamma explains delta acceleration near ATM strikes — critical for expiry-day Nifty options and gamma squeeze dynamics.
- Expiry Day Strategies for Weekly Nifty & Bank Nifty OptionsPractical expiry-day tactics — pin risk, gamma scalping, when to stay flat, and how max pain and OI shape the final session.
- Short Covering: When Bears Buy BackShort covering in index options — price rising with falling OI — and how to spot fragile rallies in Nifty intraday trading.