Positive vs Negative Gamma: Dealer Hedging

By The Oracle · For education, not financial advice.

Positive and negative gamma describe how options dealers have to hedge. When dealers are long gamma (positive), staying hedged means selling as price rises and buying as it falls, which leans against moves and tends to calm price down. When they are short gamma (negative), staying hedged means buying as price rises and selling as it falls, which goes with moves and tends to amplify them. Which regime a stock is in is an estimate from gamma exposure (GEX), and it describes how moves may behave, not which way they will go.

Gamma in one paragraph

An option’s delta says how much its price moves for a $1 move in the stock. Gamma says how fast delta changes. A dealer who has hedged an option to be delta-neutral is only neutral for an instant: as the stock moves, gamma changes the option’s delta, and the dealer has to trade stock to get back to neutral. The sign of the dealer’s gamma decides which way that trade goes. What is GEX? shows how this is added up across a whole option chain.

Positive gamma: hedging that dampens

A dealer who owns options is long gamma. Say they own calls and are hedged by being short stock. If the stock rises, the calls’ delta rises, the position gets longer, and the dealer sells more stock. If it falls, they buy stock back. Every move triggers a trade against it.

• Moves tend to be smaller and to reverse more often.
• Price often drifts back toward heavily held strikes, and can pin near one into expiration.
• Day-to-day swings tend to be smaller than in negative gamma.

Negative gamma: hedging that amplifies

A dealer who has sold options is short gamma. Say they sold puts and are hedged by being short stock. If the stock falls, the short puts make the position longer, so the dealer sells more stock, into the decline. If it rises, they buy stock back, into the rally. Every move triggers a trade in the same direction.

• Moves tend to be larger and to extend once they start.
• Ranges widen and intraday swings grow.
• Sharp sell-offs are more likely to feed on themselves.

A worked example

Each contract’s delta changes by 0.05 × $1 = 0.05, or 5 shares. Across 10,000 contracts that is 50,000 shares, about $2.5 million of stock.

• Dealer A is now 50,000 shares longer than neutral, and sells them into the rally.
• Dealer B is now 50,000 shares short of neutral, and buys them into the rally.

Same move, same size, opposite trades. If XYZ then falls $1, A buys and B sells. Across a whole market, whichever side dominates decides whether hedging leans against the day’s moves or piles on.

How to tell which regime you are in

• Total GEX. A positive total suggests a positive gamma market; a negative total suggests the reverse.
• The gamma flip. Above the gamma flip, the model estimates positive gamma; below it, negative.
• Behaviour. Tight, back-and-forth ranges fit positive gamma; trending, widening ranges fit negative gamma. Behaviour can confirm the estimate or call it into question.

Gamma squeezes

A gamma squeeze is negative gamma at its most visible. When traders buy large amounts of short-dated calls, the dealers who sell them become short gamma. As the stock rises, those dealers buy stock to stay hedged, which pushes the stock higher, which raises the calls’ delta again and forces more buying. The loop can run until the call buying stops, the options expire, or the dealers are fully hedged. The same mechanism can work on the way down when puts are bought heavily.

What gamma does not tell you

• Direction. Positive gamma is not bullish and negative gamma is not bearish.
• Timing. A market can sit quietly in negative gamma for days.
• Everything else. News, earnings, index rebalancing and large orders from other traders can overwhelm hedging flows.

The regime is most useful as a description of the kind of day to expect, read alongside the call and put walls that show where hedging is estimated to be heaviest. It also decides whether a pin into expiration is likely, which is the idea behind max pain.

Regimes in MomoEdge

MomoEdge’s GEX tab sorts each ticker into a market state from its estimated gamma, from calm, pinned states to ones where moves tend to extend, and marks the flip and the walls. The GEX tab lesson explains each state. The $10K account shows every trade our team takes with real money, winners and losers, before commissions and fees. If you want to see the regime on live data, you can see what the terminal includes.

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