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Gamma Squeeze: A Guide to the Most Underused Tool in Trading

by | Oct 8, 2024

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When it comes to trading, gamma squeeze levels are one of the most underused yet powerful tools we can leverage for predicting short-term market movements. 

If you’ve been following my trades, you know I rely heavily on reading gamma squeeze levels to spot opportunities where the market might make sharp, unexpected moves.

But first things first, some you may be wondering…

What’s a gamma squeeze? 

At its core, a gamma squeeze occurs when there’s a rapid increase in buying activity for options, which forces market makers to hedge their positions by buying or selling the underlying asset. 

This can lead to sharp price movements, particularly when options with significant open interest start hitting critical price levels. The result is often a rapid, sometimes dramatic, shift in the price of the underlying stock or index.

Why Gamma Levels Matter

When we look at gamma levels, we’re assessing where large amounts of open interest are sitting and how the market makers might be forced to react. If a certain strike price is loaded with gamma exposure, and the market starts moving toward it, that’s where things can get interesting. 

I always keep an eye on these levels, especially late in the day or when volatility is ramping up.

For instance, on days when I see gamma levels lighting up around certain strikes — say, the $561 and $560 levels on S&P 500 SPY ETF — that gives me a strong indication that we might see the market make a move toward those targets. 

When I spot this alignment, especially on an index like SPY, I might look at taking a short-term play, such as a long put or a bear put spread, to capitalize on the move.

Timing is Everything

One key thing to remember when using gamma squeeze levels is timing. I never like to jump into a trade too early. 

Let’s say I spot strong gamma levels at $561 and $560, but it’s still midday — there’s no need to rush. 

I’ll wait to see how the market develops. Does it look like those levels are holding strong? Are we starting to see price action move toward those gamma-heavy zones? Once the picture becomes clear, I’ll consider entering the trade.

Patience is the name of the game here… 

Too often, traders get burned by jumping into a gamma play too early, only to watch the market reverse. But when I see those levels building throughout the day, it gives me the confidence to take a position — often with a simple put — knowing that the gamma pressure is on my side.

Just last week, I spotted a gamma squeeze level lighting up around $561 on the SPY. Rather than rushing in, I waited until the end of the day, confirming that the levels were holding. I entered a put and, sure enough, the SPY drifted toward the $561 target, allowing me to close the trade for a solid profit.

By using gamma squeeze levels in my daily trading, I can pinpoint where the market might get forced into quick, decisive moves. 

And when I see those levels building, it’s an opportunity I’m not going to pass up.

I’ll see you in the markets. 

Chris Pulver
Chris Pulver Trading

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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk. 

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Disclaimer: We develop tools and strategies to the best of our ability, but no one can guarantee the future. There is always a risk of loss when trading past performance is not indicative of future results. The examples displayed are historical trade ideas found in real-time. There were smaller wins and those that did not work out. Since The NewsFlow Scanner is a tool for traders and not a trading service, profits and performance will vary among users. Trade at your own risk

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