The Massive AMC Short & Gamma Squeeze Explained

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8 Feb 2025

In the world of investing, few events capture the attention of both seasoned professionals and novice traders like a short squeeze. The AMC short squeeze, along with the gamma squeeze phenomenon, has become one of the most talked-about financial events of recent times. Rooted in the broader narrative of retail investors vs. Wall Street, the story of AMC Entertainment's stock surge is a captivating saga of financial strategy, market manipulation accusations, and the power of collective action.

AMC Entertainment Holdings Inc., a company once on the brink of bankruptcy, found itself at the center of a historic battle between retail investors and institutional players. What began as a fight to survive for a struggling theater chain turned into a financial spectacle that highlighted the growing influence of retail investors and the vulnerabilities of traditional financial institutions.

This article delves deep into the mechanics of the AMC short and gamma squeeze, explaining the strategies, the outcomes, and the lessons learned. We’ll explore how retail investors leveraged online platforms to mount a significant challenge to Wall Street’s dominance and what this means for the future of investing.

1. Understanding Short Selling: The Foundation of the Squeeze

To fully appreciate the AMC short squeeze, it's essential to understand the concept of short selling. Short selling is a strategy used by investors who anticipate that the price of a stock will decline. It involves borrowing shares of a stock and selling them on the open market, with the intention of buying them back later at a lower price to return to the lender, pocketing the difference as profit.

The Mechanics of Short Selling

The process begins when an investor borrows shares from a broker. These borrowed shares are sold on the market, and the investor receives cash for them. The investor hopes that the stock price will drop, allowing them to buy back the shares at a lower price and return them to the lender, thus profiting from the price difference.
However, this strategy carries significant risks. If the stock price rises instead of falling, the short seller faces potentially unlimited losses. This is because the price of a stock can rise indefinitely, forcing the short seller to buy back the shares at a much higher price, resulting in substantial financial losses.

The Risk of a Short Squeeze

A short squeeze occurs when a heavily shorted stock's price starts to rise rapidly, forcing short sellers to cover their positions by buying back the stock, which further drives up the price. This creates a self-reinforcing cycle where rising prices lead to more short covering, which in turn drives prices even higher.
The AMC short squeeze was the result of this exact mechanism, exacerbated by a high level of short interest in AMC stock combined with coordinated buying efforts by retail investors.

2. The Role of Retail Investors and Online Communities

One of the most significant aspects of the AMC squeeze was the role played by retail investors, many of whom were members of online communities like r/WallStreetBets on Reddit. These communities became hotbeds of discussion, where users shared insights, strategies, and encouragement to buy and hold AMC stock.

The Power of Collective Action

Retail investors collectively realized that by buying and holding AMC shares, they could create upward pressure on the stock price. This would force short sellers to cover their positions, potentially leading to a massive short squeeze. The idea was simple: if enough people bought the stock and refused to sell, the resulting scarcity of shares would drive up the price, compelling short sellers to buy back at much higher prices.
The collective action of these retail investors disrupted the traditional balance of power in the stock market. Historically, institutional investors like hedge funds held the upper hand due to their access to capital, information, and trading technology. However, the AMC squeeze demonstrated that retail investors, when united and coordinated, could exert significant influence over the market.

Social Media and Information Sharing

Social media platforms played a crucial role in the AMC squeeze. Platforms like Reddit, Twitter, and Discord became the primary means for retail investors to share information, strategies, and motivation. These platforms allowed for real-time communication and coordination, enabling investors to act quickly and collectively.
The speed and reach of information on social media also contributed to the rapid escalation of AMC's stock price. News, rumors, and analysis could spread instantly, prompting immediate responses from thousands of investors.

3. The Gamma Squeeze: Amplifying the Short Squeeze

In addition to the short squeeze, AMC experienced a gamma squeeze, which further amplified the upward momentum of the stock price. A gamma squeeze is related to the options market and involves the hedging activities of market makers.

Understanding Options and Market Makers

Options are financial derivatives that give investors the right, but not the obligation, to buy or sell a stock at a predetermined price (strike price) before a certain date (expiration date). A call option gives the right to buy, while a put option gives the right to sell.
Market makers, who facilitate options trading, often hedge their positions by buying or selling the underlying stock. When many investors buy call options on a stock, market makers must hedge their risk by purchasing the underlying shares, especially as the stock price approaches the strike price of the call options.

The Gamma Effect

The gamma of an option measures the rate of change in the option's delta, which is the sensitivity of the option's price to changes in the price of the underlying stock. When a stock's price rises, the delta of call options increases, prompting market makers to buy more of the underlying stock to maintain their hedged positions.
This hedging activity creates additional buying pressure on the stock, driving the price higher. As the stock price continues to rise, market makers must keep buying more shares, leading to a feedback loop that can result in a gamma squeeze.
During the AMC saga, the combination of a short squeeze and a gamma squeeze created a powerful upward surge in the stock price, leading to dramatic gains for those holding the stock.

4. The Impact on Hedge Funds and Institutional Investors

The AMC squeeze had a profound impact on hedge funds and institutional investors, many of whom were caught on the wrong side of the trade. Hedge funds that had shorted AMC stock faced significant losses as the stock price soared.

Losses and Liquidations

Several high-profile hedge funds that were heavily short on AMC were forced to cover their positions at substantial losses. The rapid increase in AMC’s stock price led to billions of dollars in losses for these funds, prompting some to liquidate their positions to avoid further financial damage.

Market Repercussions

The AMC squeeze also had broader implications for the financial markets. It highlighted the risks associated with short selling and the potential for retail investors to disrupt traditional market dynamics. The event prompted increased scrutiny from regulators and led to calls for greater transparency and oversight in the markets.

5. Regulatory Responses and Market Implications

The AMC squeeze drew the attention of financial regulators, who began investigating the trading activity surrounding the stock. The unusual market behavior raised questions about the fairness and integrity of the markets.

Regulatory Scrutiny

Regulators such as the U.S. Securities and Exchange Commission (SEC) examined the role of social media, the impact of retail investor behavior, and the practices of market makers and hedge funds. The goal was to ensure that market manipulation did not occur and to protect the interests of all market participants.

Future Implications

The AMC squeeze underscored the need for a more inclusive and transparent market system. It also highlighted the growing influence of retail investors and the need for regulatory frameworks to adapt to the changing dynamics of the financial markets.

Conclusion: Lessons Learned from the AMC Squeeze

The massive AMC short and gamma squeeze was a landmark event in the financial markets, demonstrating the power of collective action by retail investors and the vulnerabilities of traditional financial institutions. It highlighted the complexities of short selling, the impact of social media on market behavior, and the potential for significant disruptions in the market.

For retail investors, the AMC squeeze served as a lesson in the risks and rewards of speculative investing. For institutional investors and regulators, it emphasized the importance of understanding and adapting to the evolving landscape of the financial markets.

As we move forward, the legacy of the AMC squeeze will likely influence market behavior, regulatory policies, and the relationship between retail investors and Wall Street. The event serves as a reminder of the unpredictable nature of the markets and the potential for dramatic shifts driven by unexpected forces.