A stock option that is right at the money might have a Delta of 0.50, while the far out-of-the-money options might have a delta of 0.25.
They buy some shares, based on the Delta of the option, to offset their risk. So, let's say that a market maker sells a bunch of far out-of-the-money calls to a retail trader. In simple terms, the closer to the money that the option is, the higher the Gamma. Now, "Gamma" is the rate of change of the Delta.
The closer an option is to being "in the money", the higher the Delta. The higher the Delta, the more shares that the market maker will need to buy to hedge their positions. Now, the market makers calculate how many shares that they need to buy based on the "Delta" of the option that they have sold. So what do they often do? They'll buy shares of the stock in order to hedge. Now, if a stock like Gamestop has a bunch of traders buying call options because they believe that the stock is going to go up, the market makers will want to hedge their risk - after all, they don't want to sell a bunch of naked options, as that leaves them exposed to a potentially massive loss. Market makers make their money from pocketing the difference between the bid and ask - also known as the "spread". They are selling options to people that want to buy them, and they are buying options from people that want to sell them. Market makers do exactly that - they make markets. When you buy a stock option, there is a very good chance that a market maker is the entity that is selling it to you. Now, this topic can get very complicated, so I'm going to keep it simple so that you get the basic idea of a "gamma squeeze". Over the past few weeks, you may have heard the term "gamma squeeze" being used, especially in regards to the big upwards moves seen in stocks such as Gamestop and Tesla. What does the term "Gamma squeeze" mean in the world of the stock market? What is meant by a "gamma squeeze"?
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