Gamma Squeezes can be extremely profitable if you know when to jump in
A breakout of price movement also known as a “Gamma Squeeze” is caused by market makers covering option positions so as to remain delta neutral once they assess that price will move beyond the options strike price and they must cover their Delta risk
“As options trading volume has continued to increase in recent years it’s effect on price volatility has also increased dramatically.”
To ensure they remain Delta neutral overall these market makers must either buy or sell stock or futures depending on whether they are long or short. This has the effect of either accelerating the buying or the selling depending on whether the price is moving above or below the expected move. Since Gamma is highest around the stock price the situation can easily reverse and therefore we tend to see price revert back to the expected move following a Gamma Squeeze although this is usually temporary due to the overall buying or selling momentum that brought us to the expected move.
Closing above or below the Expected Move
Due in large part to these gamma squeezes, we observe strong correlations when prices breaches (or closes) outside of the weekly expected move. While there is a very high probability that price will retest the expected move on the next day, it will tend to move higher later in the week. In addition, once price closes outside of the expected move it tends to stay outside of the expected move on future closes later in the week, especially if price opens the next day outside the expected move. We see similar behavior across different volatility levels as well.