Options dealers who make markets typically hedge their exposure to the underlying. Gamma, the rate at which an option’s delta changes with price, determines how much re-hedging that requires as the market moves.
01Long and short gamma
A dealer who is long gamma becomes longer delta as price rises and shorter as it falls. To stay hedged, they sell into rallies and buy into declines, trading against the move. A dealer who is short gamma must do the opposite, buying as price rises and selling as it falls, trading with the move.
02Why it matters for price
If dealer positioning is, in aggregate, long gamma, hedging can dampen volatility and support price stability. If it is short gamma, hedging can amplify moves. Gamma exposure estimates attempt to quantify that aggregate position across price levels.
The same hedging rule can calm a market or accelerate it, depending on the sign of the position.
03Caveats
The mechanism is real, but its size relative to other flows varies a great deal. Dealer hedging is one participant’s behaviour among many, and it is often executed gradually and with discretion rather than mechanically. Gamma exposure is best read as a description of potential hedging pressure, not as a prediction of price.
Insights are research notes published for general information and education. They describe market mechanisms, not the firm’s positions or results. They are not investment advice or research recommendations, and nothing in them is an offer or solicitation.