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I understand technically what a gamma squeeze is and how it happens, but I don't understand why the banks/brokers are on the other side of you buying a call opt

• rjbwork 6y ago
  They are generally acting in a market maker role. That doesn't mean they don't think they'll make money from it though. Hedging even large delta and gamma heavy positions doesn't tend to move the market much. Something like 70-80% of options expire OTM, so they do consistently make money from collecting premiums. But a situation like the one on GME where there is MASSIVE and sudden interest in the stock to the tune of billions of dollars worth of buy orders for both stock and options being placed in a short amount of time along with tens of thousands of people encouraging each other not to sell combined with the insane short interest and shares held by institutions that reallocate infrequently...you can end up with a disaster like the GME gamma squeeze that leaves MM's in somewhat of a prisoner's dilemma. They're more or less obligated to cover because the others are more or less obligated to cover. Meaning that they're ultimately all going to have to cover, driving the price up. So usually they do make good money from selling options since they ultimately keep the premium of most options. Sometimes they don't though.