Positive vs negative gamma and dealer hedging

What gamma means for a dealer

An option's delta is how many shares of the underlying the option moves like. Its gamma is how much that delta changes when the underlying moves by $1.

A dealer who takes the other side of a customer's options trade commonly hedges the delta by trading the underlying, so that small moves neither make nor lose them much money. When price moves, gamma changes the delta, and the dealer has to trade again to stay hedged. Whether that trade is a buy or a sell depends on the sign of the dealer's gamma.

• Long gamma (positive). The dealer owns options on balance. Delta rises as price rises and falls as price falls.
• Short gamma (negative). The dealer has sold options on balance. Delta falls as price rises and rises as price falls.

How hedging can damp or amplify a move

Positive gamma

A long-gamma dealer gets longer as price rises. To get back to neutral, they sell some of the underlying. As price falls they get shorter, so they buy. They sell into strength and buy into weakness, which opposes the move. That is why positive gamma tends to come with smaller daily ranges.

Negative gamma

A short-gamma dealer gets shorter as price rises, so they buy. As price falls they get longer, so they sell. They buy into strength and sell into weakness, which adds to the move. That is why negative gamma tends to come with wider ranges and faster moves.

	Positive gamma	Negative gamma
Assumed dealer position	Long options on balance	Short options on balance
Hedge as price rises	Sell the underlying	Buy the underlying
Hedge as price falls	Buy the underlying	Sell the underlying
Effect on the move	Leans against it	Adds to it
Tendency	Smaller ranges, calmer trading	Wider ranges, faster moves
Owl Mastery's sign	Positive net exposure	Negative net exposure
Side of the HVL	Above	Below

A worked example

The numbers here are illustrative, not live data. Say net exposure, summed across all strikes, is +$200 million per $1 move. If price rises $2, the model says dealers' delta grows by about $400 million, and to stay hedged they would sell about $400 million of the underlying. If net exposure were -$200 million instead, the same $2 rise would leave dealers about $400 million shorter, and they would buy about $400 million.

Gamma itself changes as price moves, so this arithmetic holds only for small moves. It shows the direction of the hedging flow, not its exact size.

How Owl Mastery signs gamma exposure

Open interest shows how many contracts are open at each strike, not who holds them. To turn it into a dealer position, Owl Mastery uses a simplifying assumption. The model takes dealers to be long the calls and short the puts that their customers trade.

• Call exposure counts as positive.
• Put exposure counts as negative.
• Net exposure is call exposure plus put exposure.

Each value is in dollars of delta-hedging exposure per $1 move in the underlying, summed across expiries. The gamma exposure article covers the measure itself, and the methodology lists every formula.

Under this convention, the HVL is the strike where the running sum of net exposure, from the lowest strike up, is lowest. Below it, net exposure is negative on balance, and above it, positive on balance. Owl Mastery's dashboard and ticker pages show which side of the HVL the close is on.

How to read the gamma regime

• Range expectations. Positive gamma tends to come with narrower daily ranges and negative gamma with wider ones. The one-day range gives a separate estimate from implied volatility, and the two can be read side by side.
• Reference levels. Call resistance and put support are the strikes with the largest positive and the most negative net exposure. A rally may stall at the first and a decline may slow at the second.
• Risk. The regime describes how large moves may be, not what to do about them.

The SPX page shows the HVL, the walls and the one-day range for the latest close.

Limits of the dealer-gamma model

• Who holds what. Open interest does not show sides. When customers buy calls in size, dealers may be short those calls, the opposite of the model's assumption. Then a rally can push dealers to buy, and the real regime can be more negative than the signs suggest.
• Hedging varies. Dealers may hedge with other options or futures, hedge at different times, or leave some delta unhedged.
• Once a day. Owl Mastery computes exposure after each US close from the options open interest for that day. Positions opened and closed within a session, including many same-day expiry trades, never appear in it.
• Gamma moves. Gamma shifts with price, time to expiry and implied volatility, so the regime at the close can differ from the regime during the next session.
• A tendency, not a forecast. Hedging competes with every other buyer and seller. The sign of gamma says how hedging may react to a move, not which way price goes.