Dealer gamma

Why dealers hedge at all

When you buy a call, a market maker is on the other side. They are now short that call, and if the stock rallies they lose. Market makers are not paid to take directional risk — they are paid the spread between bid and ask, thousands of times a day. So they neutralise the direction by buying shares against the short call.

The problem is that an option's sensitivity to the stock is not constant. As the stock rises, a call's delta rises too — from 0.30 to 0.50 to 0.80 — so the hedge that was correct this morning is wrong this afternoon. Gamma is the rate at which that hedge goes stale. A high-gamma position forces the dealer to re-hedge constantly, buying and selling stock all day simply to stay neutral.

That re-hedging is the flow we care about. It is mechanical, it is large, and unlike opinion it is forced. The direction it pushes depends entirely on which side of the options the dealers are holding.

The two regimes

When dealers are long gamma — typically because customers have sold them options, or bought heavily at strikes now surrounding the price — their hedging works against the move. Stock rallies, their delta grows, they sell stock to stay flat. Stock falls, they buy. They are systematically selling strength and buying weakness, which compresses the range. This is the pinning behaviour you see on quiet expiry days.

When dealers are short gamma, the sign reverses and so does the behaviour. A rally forces them to buy more stock; a decline forces them to sell. Their hedging now runs with the move, adding fuel to it. Ranges expand, trends persist, and sell-offs accelerate rather than fade.

This is why the Regime field on the Terminal is the first thing to read. It is not a forecast of direction. It is a statement about the character of the day: whether moves are likely to be absorbed or extended. The same news lands very differently in the two regimes.

What the Regime card actually shows

The label is derived from one thing: the sign of the Net GEX figure beside it, which is total dealer gamma summed across every strike in scope. Positive reads long gamma, negative reads short.

Long γ · pin

Net GEX is positive. Dealer hedging leans against price — selling rallies, buying dips — which compresses the range and tends to hold price near high-gamma strikes. "Pin" names that consequence; it is a plain-English gloss, not a separate calculation.

Short γ · trend

Net GEX is negative. Hedging runs with the move instead, buying strength and selling weakness. Ranges expand and moves persist rather than fade.

Two things to hold in mind. The threshold is hard at zero, so a small positive and a small negative total produce opposite labels despite describing nearly identical conditions — when Net GEX sits near zero, treat the regime as genuinely ambiguous and check the slope of the cumulative gamma curve in Chapter 2. And the card follows your expiry selection: choosing a single expiration recomputes it for that expiration alone, so the label can differ from the whole-surface reading. That is correct behaviour, not instability.

Reading the gamma profile

The profile chart shows net gamma exposure at each strike, in dollar notional. Positive bars are strikes where dealer hedging dampens movement; negative bars are strikes where it amplifies. Three landmarks matter.

Call wall

The strike with the largest positive gamma concentration above spot. Dealers there are heavily hedged in a way that sells into rallies, so price tends to decelerate as it approaches. It often behaves like resistance — but the mechanism is hedging supply, not chart memory.

Put wall

The mirror image below spot: heavy gamma where dealer hedging buys into declines. Dips often find support there, which is why it is watched as a downside marker on index products.

Zero-gamma flip

The price at which aggregate dealer gamma crosses from positive to negative — the boundary between the two regimes. Above it, expect dampening; below it, expect amplification. This is the single most important level on the chart, because it tells you which set of rules the market is playing by.

Max pain

Max pain is the strike at which the largest total value of open options expires worthless — the price that would inflict the most aggregate loss on option holders. It is computed from open interest, not from any assumption about manipulation.

Treat it as a weak, slow signal. It carries most information late in an expiry cycle on heavily traded names, when a large share of open interest is about to expire and dealer hedging around those strikes dominates the flow. Early in a cycle, or on a name with dispersed open interest, it means very little. It is included on the Terminal because it is cheap context, not because it predicts where price will close.

How this is used in practice

The honest version: gamma structure tells you about conditions, not direction. It is context you apply to a trade idea you already have, and there are three common uses.

• Position sizing by regime. The same setup deserves different risk in long gamma than in short gamma, because the distribution of outcomes is genuinely different — tighter ranges versus fat tails.
• Target and stop placement. Walls are natural places for a move to decelerate. Traders take profit into them rather than through them, and treat a decisive break of the flip as a change of character rather than noise.
• Anticipating volatility. Price crossing below the flip is the transition from dampening to amplification. Sessions that break down through it often expand in range far more than the initial move suggests.

What it cannot do is tell you which way price will go. Gamma structure is a map of how the road behaves, not a direction of travel. Every level here is computed from open interest that updates once daily, so treat walls as zones rather than precise prices, and expect them to move as positioning changes.