Gamma

Gamma in practice

Gamma is the second derivative of the option price with respect to the underlying. If delta tells you the speed of P/L change, gamma tells you the acceleration. A long at-the-money call on a $100 stock with 30 days to expiry typically has gamma around 0.04, meaning delta moves by 4 percentage points for every $1 move in the underlying. Doubling-up traders who size on delta alone often discover too late that gamma is doing most of the work in the last week of an option's life.

Why short gamma blows up

When you sell options, you are short gamma. As the underlying moves toward your strike, delta accelerates against you. A trader short an ATM SPY call who sees SPY rip 2% in a session can be hedging frantically as their net delta exposure compounds. Most option-selling blowups in retail are gamma blowups, not vega blowups. The classic warning sign is a covered-call writer who set up for a quiet week and finds themselves chasing delta as the stock pierces strike.

Dealer gamma positioning and intraday flow

Market makers who hedge their book continuously create predictable intraday flow. When dealers are net short gamma (typical after big retail call buying in names like NVDA or TSLA), they have to BUY the underlying as it rallies and SELL as it falls, amplifying moves. When dealers are net long gamma (common in SPX after rolling out positions), they buy dips and sell rips, dampening volatility. Sites like SpotGamma, SqueezeMetrics, and Tier1Alpha quantify dealer GEX daily.

• Dealer short gamma → volatility amplifier
• Dealer long gamma → volatility dampener
• Major options-expiration days (third Friday) often see gamma flips that shift the regime
• 0DTE (zero-days-to-expiry) options have made dealer gamma more volatile intraday since 2023

Gamma scalping as a strategy

A delta-neutral long-gamma position profits from realized volatility. The trade: buy an at-the-money straddle, delta-hedge continuously by trading the underlying against your changing delta. If the stock chops more than the implied vol you paid for, you make money. Practitioners include vol arb desks and some quantitative hedge funds. The hard part is execution cost: bid-ask and slippage on the hedge can erase the theoretical edge.

Gamma at expiration

At-the-money options on expiration day can have effectively infinite gamma. A $100 stock at $100 with 30 minutes to expiry can produce option prices that swing dramatically on $0.50 moves in the stock. This is why 0DTE strategies are so hazardous — the gamma exposure dwarfs typical retail sizing intuition. A $5 credit spread can produce a $400+ debit by close if the stock pins the short strike.

Reading gamma exposure (GEX)

Aggregate dealer gamma exposure is published daily for SPY, QQQ, and large single names. A typical SPX GEX of +$5B means dealers will sell $5B of futures for every 1% rally and buy $5B for every 1% drop. When GEX flips negative, the market often enters a higher-vol regime; expect overnight gaps and bigger intraday ranges. Negative GEX environments coincided with most of the major drawdowns since 2018 (Q4 2018, March 2020, October 2022).