Gamma exposure (GEX)
Market makers who sell options do not want to bet on the stock, so they hedge, buying and selling shares as the price moves. How much they must trade depends on their gamma. Gamma exposure, or GEX, estimates it, and with it whether their hedging tends to calm a stock's moves or to push them further.
Gamma, briefly
An option's delta is how much its price moves for a $1 move in the stock; gamma is how much the delta itself changes. A dealer who has hedged a position's delta must trade shares again as soon as the stock moves, and gamma says how many. Gamma is largest for options at the money and close to expiry.
Positive and negative gamma
- Dealers long gamma must sell shares as the stock rises and buy as it falls. Their hedging leans against the move, which tends to damp it: ranges narrow, and prices can pin near large strikes.
- Dealers short gamma must buy as the stock rises and sell as it falls. Their hedging goes with the move and can feed it: moves run further and faster.
How GEX is estimated
Nobody publishes dealers' positions, so GEX rests on an assumption. The common one, which Options Meerkat uses, is that the public buys calls and puts and dealers are on the other side: dealers long the calls and short the puts the public holds. Each contract's open interest then counts toward the dealers' gamma, calls positive and puts negative, in dollars of stock to trade for a 1% move:
GEX = gamma × open interest × 100 × spot² × 1%
Summed strike by strike, it gives a profile of where the dealers' hedging is heaviest.
The gamma flip
The total changes as the stock moves, since every option's gamma depends on where the stock is. The gamma flip is the price where the total crosses zero: above it the dealers are taken to be long gamma, below it short. A stock trading above its flip tends to move more quietly; one that falls through it can move more sharply, as the hedging turns from damping to feeding.
Call and put walls
The call wall is the strike holding the most call gamma, and the put wall the strike holding the most put gamma. Heavy hedging around them can make them act as resistance and support, especially into an expiry. They are levels to watch, not barriers.
The limits
GEX is an estimate on an assumption. Dealers are sometimes long puts and short calls (a fund selling covered calls, for one), open interest is a day old, and much hedging happens in futures and other markets. It is most useful for index products and very liquid stocks, where dealers' books are large, and it says little about news-driven moves, which no hedging holds back.
In Options Meerkat
A symbol's detail page has a dealer exposure strip: gamma by strike, the flip, and the call and put walls, over one expiry or several, with the delta, vanna, and charm exposure beside it. Ask Meerkat, the chat, where a symbol's gamma flip is and it works the profile out from the whole chain, opens the exposure view, and says what it suggests for the next sessions.