This explanation misses one major piece of the whole affair: it was not only a short squeeze (mostly, it was at first), but also a gamma squeeze (or gamma trap). It has to do with the hedging of option sales.
Here is a short explanation I wrote for a colleague:
gamma trap: most options are sold by market makers (e.g. investment banks), and they hedge the options they sell by purchasing (or selling) stock in order to be “delta neutral” so if they sell one call at the money (strike price = current price), the delta is 0.5 (if the stock price increases by 1$, the call price will increase by 0.5$), and they will buy 50 shares to hedge (now if the price increases by 1$, they are up 50$ on the stock, down 50$ on the call, and they still profit by pocketing the premium) as an option gets in the money (strike price < current stock price), its delta increases, meaning the market maker must increase the number of stock it purchases to continue being delta-neutral here what happened is that redditors purchased a lot of cheap out of the money call options (low delta), and as the stock price rose and rose, these ended up far in the money, meaning the market makers had to purchase 100 stocks for each of these calls, driving the stock price higher, and pushing all calls farther in the money
ah, and gamma = the rate of change of delta depending on the stock price (so in particular here the fact that delta increases when an option gets in the money)
This explanation misses one major piece of the whole affair: it was not only a short squeeze (mostly, it was at first), but also a gamma squeeze (or gamma trap). It has to do with the hedging of option sales.
Here is a short explanation I wrote for a colleague:
Yeah I didn’t write about the gamma squeeze because I wanted to keep the length of the post short. But you bring up an excellent point.