In January 2021, the stock of video game retailer GameStop Corp (NYSE:GME) captured the world’s attention as it experienced a rare short squeeze. This event saw the price of GME rapidly increase over 2,500% in less than three weeks. Around the same time, several other stocks with similar characteristics found popularity with online communities such as Reddit’s WallStreetBets subreddit. Some of these also saw swift and dramatic price increases. Perhaps the most notable among them was movie theater chain AMC Entertainment Holdings (NYSE:AMC).

The intense price increases put a new spotlight on the stock market and drove a large increase in retail trading. Thousands of individual investors piled into a situation they may not have fully understood. The trading frenzy prompted an interesting reaction from some social media platforms as they attempted to crack down on what they saw as misinformation. The trading activity even drew the ire of politicians, and famously caused brokerages to restrict trading.

There were multiple factors that drove the waves of rapid price movement. The first wave was a classic short squeeze, but options traders played their part in the second wave by creating a gamma squeeze.

A short squeeze takes place when the rapid increase of a stock price forces investors who sold that stock short to buy back those shares. If there are a large number of short sellers closing out their positions, this drives the prices of the stock higher even as more buyers are drawn in by the rapidly rising price. For short sellers it is a vicious cycle to the upside.

A gamma squeeze is a similar situation, but instead of being driven solely by the stock price, a gamma squeeze is driven by option activity. In the case of GME shares, the highly visible short squeeze was followed up shortly after by a gamma squeeze.

Often, because of short squeeze potential, investors who sell short a stock will cover their short position by buying long, out-of-the-money call options. As GameStop’s share price rose, more short-sellers sought to take advantage of the stock’s predicted fall, in turn hedging their short position through the purchase of more out-of-the-money call options. Additionally, speculators continued buying short-term out-of-the-money call options, betting that the GameStop share price would continue to rise.

As more out-of-the-money call options were traded, market makers on the opposite side of those trades had to buy shares of the stock to hedge their own position. This caused the stock price to rise rapidly in a second wave of price increases.

Gamma, as a measure of option price acceleration, is the variable that describes the effect of a rapid price rise in options. That’s where the situation gets its name. A gamma squeeze is what helped accelerate the GameStop rally in February and the AMC price increase in June.

In the GameStop situation, as the squeeze unfolded, the price of both the stock and options on the stock became incredibly expensive. This started to price out retail traders who had previously been piling on in droves. Once momentum slowed, so did the price of options. This meant the market makers who had bought shares of the stock to hedge their positions no longer required them and could sell, which put downward pressure on GameStop’s share price for a time.

It is interesting to note that the price of GME shares fell below $40 per share in early February after the short squeeze. However, after the gamma squeeze a few weeks later, the price of the shares has averaged well over $100 per share, suggesting that investors do indeed like the stock.

The brainchild of co-founders Vladimir Tenev and Baiju Bhatt, Robinhood was lauded for disrupting the online retail brokerage business. By offering commission-free trades via a slick mobile app, Robinhood leveraged a regularly ignored group – young people new to investing. The tactic proved successful, and as of July 2021 the company has 18 million active accounts, with $80 billion in assets under custody. However, public opinion has soured after the role the company played in the GameStop (and “meme stock”) fiasco.

In late January 2021, GameStop stock started a meteoric rise, famously captivating the world. The dramatic share price increase was being touted as one of the greatest transfers of wealth of all time – until online brokerages stepped in, restricting trading of GameStop. Robinhood was not the only online broker to suspend purchasing of GameStop shares, but they were perhaps the most prominent.

Retail investors were furious, and the main target of their fury was Robinhood. Investors weren’t the only ones who targeted Robinhood, as the aftermath of the GameStop situation led to multiple lawsuits against the company, including for wrongful death by the family of Alex Kearns, a 20-year-old customer who took his life last summer after believing he had racked up big losses on the millennial-favored stock trading app.

Robinhood’s CEO, Vladimir Tenev, was called to testify to the U.S. House Financial Services Committee regarding the GameStop fiasco. Legislators grilled Tenev over payment for order flow, the subsidy Robinhood receives from market makers for bringing them trades. In the first quarter of 2021, Robinhood collected $331 million for payment for order flow.

In late June 2021, FINRA announced it had fined Robinhood $57 million and ordered the company to pay almost $13 million in restitution, plus interest, to thousands of harmed customers. FINRA said that Robinhood customers “received false or misleading information from the firm, millions of customers affected by the firm’s systems outages in March 2020, and thousands of customers the firm approved to trade options even when it was not appropriate for the customers to do so.”

Despite all of this negative attention, Robinhood’s fundamental business model has not changed. The company’s revenue has skyrocketed and they continue to add new users. Analysts are expecting that the company should be able to shrug off its most recent controversies and have a successful IPO.