How to Determine if the Market is in a Positive or Negative Gamma Environment
Market structure is heavily influenced by the positioning of options dealers, and one of the most crucial factors in understanding market dynamics is whether we are in a positive gamma or negative gamma environment. The distinction between these two regimes can dictate price stability, volatility, and even the direction of intraday and multi-day market moves.
In this blog post, we’ll break down what gamma is, how it impacts market movements, and how traders can determine whether the current market environment is being influenced by positive or negative gamma positioning.
What Is Gamma?
Gamma is the rate of change of an option’s delta relative to the underlying asset’s price movement. In simpler terms, gamma tells us how an option’s delta will shift as the price of the underlying stock or index moves.
Positive Gamma: When dealers are long gamma, they hedge in a way that reduces volatility.
Negative Gamma: When dealers are short gamma, they hedge in a way that increases volatility.
Gamma exposure is most relevant for options dealers and market makers who dynamically hedge their positions. The way they hedge (buying or selling underlying assets) depends on whether they are in a positive or negative gamma regime.
How Positive Gamma Impacts Markets
In a positive gamma environment, options dealers are net long gamma and hedge their positions by trading in the opposite direction of market moves. This has a dampening effect on volatility because their actions counteract price swings.
Key Characteristics of Positive Gamma Markets:
✅ Lower volatility – Dealers absorb price fluctuations by counteracting moves. ✅ Mean-reverting behavior – The market tends to pull back after rallies and recover after dips. ✅ Tighter trading ranges – Major indices like the S&P 500 and Nasdaq-100 move in more controlled patterns. ✅ Orderly price action – Large intraday swings are less common. ✅ More stable options premiums – Implied volatility (IV) often remains suppressed.
Example:
If the S&P 500 is rising, dealers sell futures to hedge.
If the S&P 500 is falling, dealers buy futures to hedge.
This creates a stabilizing effect, reducing market volatility.
Positive gamma environments typically occur above key option strike levels where there is a large concentration of open interest in calls relative to puts (e.g., major resistance levels).
How Negative Gamma Impacts Markets
In a negative gamma environment, options dealers are net short gamma and hedge their positions by trading in the same direction as market moves. This amplifies volatility because their hedging actions reinforce price momentum instead of dampening it.
Key Characteristics of Negative Gamma Markets:
🚨 Higher volatility – Markets experience larger, more erratic swings. 🚨 Momentum-driven moves – Price trends tend to accelerate. 🚨 Larger intraday price swings – Wide trading ranges are more common. 🚨 Breakouts and breakdowns sustain – Trends persist rather than mean-revert. 🚨 Spiking implied volatility (IV) – Options become more expensive due to increased demand.
Example:
If the S&P 500 is rising, dealers buy more futures, pushing prices higher.
If the S&P 500 is falling, dealers sell more futures, accelerating the drop.
This creates self-reinforcing trends, leading to more violent moves in both directions.
Negative gamma environments typically occur below key strike levels where puts dominate, forcing dealers to hedge aggressively in response to price swings.
How to Identify Whether the Market is in Positive or Negative Gamma
Traders and investors can track gamma exposure using several key indicators and reports:
1. Look at Dealer Gamma Exposure Reports
Investment banks, proprietary trading firms, and research providers publish daily gamma exposure estimates. Notable sources include:
SpotGamma – Provides daily dealer gamma positioning estimates.
Nomura Quant Team – Releases systematic positioning updates.
Goldman Sachs Derivatives Desk – Monitors gamma exposure in their institutional research.
If estimates show dealers are net long gamma, the market is in a positive gamma environment. If estimates show dealers are net short gamma, the market is in a negative gamma environment.
2. Monitor the Gamma Flip Level
The gamma flip is the key price level where dealers transition from positive gamma to negative gamma.
Above the gamma flip → Positive gamma (calm, stable market)
Below the gamma flip → Negative gamma (higher volatility, aggressive moves)
Gamma flip levels shift daily based on options positioning. Traders should track whether the market is trading above or below this threshold to gauge the expected volatility regime.
3. Watch Key Options Strike Levels and Open Interest
Large call open interest above the market suggests positive gamma.
Large put open interest below the market suggests negative gamma.
OPEX (Options Expiration Dates) can cause gamma positioning to reset, leading to sudden volatility shifts.
4. Observe Market Volatility (VIX, Implied Volatility, ATR)
Rising VIX & implied volatility → Suggests negative gamma, as dealers struggle to hedge.
Falling VIX & stable implied volatility → Suggests positive gamma, as dealers suppress large swings.
ATR (Average True Range) expansion → Suggests negative gamma, as trading ranges widen.
5. Track Intraday Price Action & Reactions to Market Moves
In a positive gamma environment: Markets experience controlled pullbacks and limited rallies.
In a negative gamma environment: Large momentum-driven moves persist with limited reversals.
Observe Market-on-Close (MOC) orders: Large imbalances suggest gamma-driven flows impacting late-day movement.
Real-World Example of a Gamma Flip
September 2022 Selloff
Leading up to September’s FOMC meeting, markets were trading below key gamma levels.
Dealers were short gamma, leading to accelerated selling as the S&P 500 broke below 3,900.
Implied volatility spiked, confirming a negative gamma regime.
Once markets recovered above 4,000, positive gamma returned, stabilizing price action.
Conclusion: Using Gamma to Enhance Market Strategy
Understanding whether the market is in a positive or negative gamma environment allows traders to anticipate volatility and adjust their strategies accordingly:
Positive Gamma → Expect calmer markets, mean-reverting price action, and tighter trading ranges.
Negative Gamma → Prepare for larger swings, momentum-driven trends, and increased implied volatility.
By tracking gamma exposure levels, key strike positions, implied volatility, and price action, traders can position themselves ahead of major market moves rather than reacting after the fact.
