In gamma compression, the price of a stock rises rapidly based on traders buying many calls to drive up the prices of certain stocks due to options sellers having to hedge their trades in stocks under. -jacent. Thus, gamma compression can occur when there is widespread buying activity of short-term call options in a particular stock.
Gamma is an investment term associated with the Greeks. These terms are used to describe various positions when trading options. Gamma and delta, as well as the others, can be used together to design a strategy for betting on the future movement of a stock’s price. To note,
is the rate of change in the price of options for each change in the price of the underlying stock. Delta is a linear function, which means it will not change proportionally over the course of the stock. Whereas gamma refers to the rate of change of the delta. As the delta value increases or decreases, its respective curves and option market makers buy or sell options to maintain their hedges.
Traders are watching gamma compression closely after the recent wild moves in the market. As stock prices soared, traders who had sold the options have to hedge their positions, resulting in gamma compression.
Gamma compression is not the only factor driving the market higher, but it can be one of the factors. Gamma compression can be an opportunity for investors, but it can also be risky depending on what is driving short compression to trigger gamma compression. They can last for days or weeks. Thus, timing plays an important role in determining whether gamma compression results in a profit or a loss for your trade. On the other hand, once a gamma compression reaches its peak, price reversals can occur so quickly that a trader can see a sharp drop in stock prices.
(DK Aggarwal is the CMD of SMC Investment and Advisors)