Dealers and positive or negative gamma

Why option positions can push the price, and what the weather words on every page mean.

Gamma is how fast an option's delta changes as the price moves. Delta is how much the option moves per dollar the coin moves. Market makers who sell options to customers usually hedge by trading the coin, and the amount they need to trade changes as delta changes. That is where gamma meets the market.

Two regimes

Positive gamma: when the price rises, hedging calls for selling, and when it falls, for buying. The hedging leans against the move and tends to damp it. Moves are smoother and tend to revert.
Negative gamma: the hedging goes the other way. A rise forces buying, a fall forces selling. It leans with the move and can amplify it. Moves can run further and faster.

An assumption, stated plainly

Nobody publishes who holds which option. Knowla follows the common convention that call gamma counts as positive and put gamma as negative, and sums them in dollar terms for a 1% move. That sign is a way of drawing the chart. It is not a record of who bought, and the true split between hedgers and speculators is unknown. Read the result as the shape of the book, not a measurement of anyone's position.

The weather words

The card above every page compresses the near-term book into one word. It looks only at expiries within about a month, and it combines the sign of net gamma with how far the price is from the gamma flip (lesson 6).

Clear and Fair: net gamma is positive. Clear means the flip is well away; Fair means it is close.
Showers and Storm: net gamma is negative. Showers means the flip is close; Storm means it is well away.
Unsettled: the price is within about 1% of the flip, or net gamma is under 2% of the book's total gamma. Either way there is no clear lean, and a small move could change which way hedging leans.

Colors

Green always means damping, positive gamma. Red always means amplifying, negative gamma. Amber is undecided.

See it on the data.

Open the Overview