What it means
Dealer gamma is the estimated gamma position held specifically by options market makers, as opposed to total gamma reflected in open interest. The distinction matters because not all options open interest is dealer-held: investors hold puts as protection (dealers are short puts = short gamma), institutional traders hold calls for speculation (dealers short calls = short gamma), but some flow is balanced between investors (no dealer gamma impact). Estimating dealer gamma requires modeling who's on which side of each contract — done by services like SpotGamma using flow data, exchange reports, and statistical models.
Why it matters
Total open-interest gamma overstates dealer hedging requirements because some of it is investor-to-investor. Dealer gamma is the SUBSET that matters for hedging-flow analysis. When dealer gamma is negative and large, dealer hedging flows are amplifying market moves. When neutral or positive, dealer flow is suppressing. The distinction between total OI gamma and dealer gamma can be 30-50% — getting it wrong means mis-reading the structural setup.
How to use it
Use specialized providers (SpotGamma, Tier1Alpha) that decompose total gamma into dealer-attributable portions. Track dealer gamma trend over multiple sessions — sustained negative dealer gamma = persistent vol amplification. Combine with VIX and realized vol for fuller picture.
Want a worked example or a deeper dive? Ask Rocky how this concept applies to your specific watchlist or trade idea.
Ask Rocky