Options positioning: who's on the other side.

01GameStop, January 2021: the squeeze everyone saw

At the end of 2020 GameStop's stock traded a little under $20. On January 27, 2021, it closed at $347.51, and the next day it touched $483.00 before falling back. (Those are prices before its 2022 four-for-one split.) Online, one explanation spread fast: a "gamma squeeze." Small investors were buying call options in huge numbers, the story went, and the market makers who sold them had to buy the stock to hedge, which drove the price up, which forced more buying.

It is a real mechanism, and this lesson explains how it works. But when the SEC's staff studied those weeks, they reported that they "did not find evidence of a gamma squeeze in GME during January 2021." The jump in small investors' options trading was mostly in puts, not calls, and market makers were buying calls rather than selling them. Short sellers buying back shares likely added to the rise, the staff found (a short squeeze: traders who had bet against the stock buying it back to get out, a different loop), though their buying was a small part of the total; it was "positive sentiment" among buyers that sustained it. The online story needed dealers on the short side of the calls; the staff found them buying calls instead. A group of academics, including Joshua Mitts and Lawrence Glosten, disputed the report's conclusions in 2022.

A mechanism everyone talked about, and a regulator saying it wasn't what happened that time. That gap is what this lesson is about: how options positions can move stocks, and how to tell a real effect from a good story.

02Who's on the other side

When you buy an option, the seller is often a market maker: a firm that quotes prices all day and makes its money on the gap between what it buys and sells at, not on which way the stock goes. Holding a pile of options exposes it to the stock's direction, so it hedges by trading the stock itself, keeping its book close to neutral. The options lesson calls the option's sensitivity to the stock its delta; the hedge is sized to cancel it.

03Calming or feeding: long and short gamma

Whether hedging calms the market or feeds it depends on which side of the options the dealers are on.

• Dealers short options (customers bought them): as the stock rises, dealers buy; as it falls, they sell. Their hedging chases the move and makes it bigger. Traders call this short gamma.
• Dealers long options (customers sold them, for instance writing calls against shares they own): as the stock rises, dealers sell; as it falls, they buy. Their hedging leans against the move and damps it. That's long gamma.

Puts work the same way. A dealer who sold puts to someone buying insurance is short gamma too, and has to sell into a falling price. (A put and a call with the same strike and expiry have the same gamma, so the calculator below covers both.) Put the two together and you get the usual shape of an index book: funds sell calls to earn premium, and buy puts for insurance. Dealers end up long gamma above the market and short gamma below it, so rallies tend to be damped and sell-offs fed, more so as a fall carries the index down through the strikes where most puts sit. A meme stock is the other case: a single stock where the crowd buys calls and the dealers are short them.

The effect is biggest near the strike and near expiry, because that is where an option's delta changes fastest. In the example above, the same 10,000 calls with one day left would force the dealer to trade about 254,000 shares for each $1 move, more than five times the 30-day figure.

04Expiration day

Monthly stock options expire on the third Friday of the month. Four times a year, in March, June, September and December, stock index futures and options expire on the same day, usually that third Friday: triple witching, a name from the days when three kinds of contract expired in the same hour.

On expiration days, stocks with listed options close at or near a strike price more often than chance would suggest. Ni, Pearson and Poteshman found this pinning in a 2005 study, and traced it to market makers' hedging and to manipulation by firms' own proprietary traders.

Expiry no longer comes once a month, either. S&P 500 options now expire every trading day, and options traded on the day they expire, called 0DTE for "zero days to expiry," made up 59% of S&P 500 options volume in 2025 and a record 66% in July 2026, by Cboe's count. Some strategists warned that a sharp move could force the investors who sell these options into a rush of buying or selling big enough to jolt the whole market. Cboe, which lists those options and earns a fee on every trade, studied market makers' same-day positions and found them close to balanced, with hedging needs that were small next to daily trading in S&P 500 futures.

05The gamma squeeze

A gamma squeeze is the short-gamma loop from section 03 at full strength. Investors pile into calls, often short-dated and above the current price. The dealers who sold them buy stock to hedge. The price rises toward the strikes, which raises the calls' delta, so the dealers buy more. It feeds on itself until the buying stops or the options expire.

Whether it is driving a given rally is hard to tell from outside, because only the dealers know their positions. Researchers have measured a related effect: across more than 60 futures markets back to 1974, Baltussen, Da, Lammers and Martens (2021) found that the last half hour of trading tends to follow the rest of the day's move, which they link to hedging by option market makers and leveraged ETFs that are short gamma, and that the effect reverses over the next few days. That is evidence of the mechanism, not a trade: the effect is small, it reverses, and the authors warn that after trading costs it may not pay for many investors. GameStop shows the other side of it: a story can be everywhere and still not be what happened.

06Open interest and the put/call ratio

Two numbers describe options activity. Volume is how many contracts traded in a day. Open interest is how many are still open at the end of it: positions someone has opened and not yet closed. A contract counts in open interest once, however many times it changes hands.

The put/call ratio divides put volume by call volume. Cboe publishes several each day, for individual stocks, for indexes and for S&P 500 options alone. On single stocks the ratio usually runs well below 1, because buying calls is the popular bet; on indexes it runs higher, because institutions buy index puts as insurance. Traders read a high ratio as fear and a low one as greed, and some treat the extremes as a sign the crowd has gone too far.

The evidence on that is mixed. A 2006 study by Pan and Poteshman found that options trading does carry information: stocks whose option buyers were opening relatively few puts against calls beat those with many by more than 0.4 percentage points the next day. But it relied on detailed data on who was opening new positions, which the public ratio doesn't show.

07What holds up, and what doesn't

Options positioning has become a whole genre of market commentary. Some of it rests on solid research, some on assumptions you can't check from outside, and some on very little.

08Try it: be the dealer

Set the dealers' position, the strike and the time to expiry, then move the stock. The gold line shows how many shares the dealers must trade for each $1 rise in the stock, at every price; positive means buy. The dashed line is the same book with 30 days left, for comparison.

Slide the time to expiry down to a few hours with the stock at the strike, and watch the spike: that is why expiration days can get jumpy near big strikes. Then switch the dealers to long and see the sign flip: the same position, now pushing back against every move.

09Common misreads

• "Heavy call buying means smart money is bullish." You rarely know who bought, or why: a call can be a bet, a hedge, or one leg of a spread.
• "The put/call ratio calls tops and bottoms." It describes the mood. As a timing signal, it's weak.
• "Dealers push prices on purpose." Hedging is mechanical: dealers trade to stay neutral, and the effect on price is a side effect. The documented exception is proprietary traders nudging prices toward a strike at expiry (section 04), which is manipulation, not hedging.
• "Stocks close at max pain." It isn't a rule: the evidence is thin and mostly about small, thinly traded stocks; see section 07.