6. Options and the volatility desk

Dealer gamma (GEX)

Dealer gamma (GEX) estimates how much option dealers would trade per 1% move to stay hedged, under an assumption about who holds which option, and where that estimate flips sign.

  • 4 min
  • 3 questions
  • Lesson 2 of 3

Why you would care

"We're above the gamma flip, expect chop." "Below the flip, moves get violent." Market commentary is full of gamma talk. The idea is real; the numbers are estimates built on an assumption. This lesson gives you both.

The idea from scratch

From What a volatility desk does: a dealer who holds options delta-hedges them. How much it must trade as the price moves depends on gamma.

  • If dealers are long gamma (they own the options), hedging means selling when the price rises and buying when it falls: they lean against moves. Markets tend to be calmer.
  • If dealers are short gamma (they sold the options), hedging means buying when the price rises and selling when it falls: they chase moves. Markets can swing harder.

The assumption

Nobody publishes who holds which option. GEX uses a convention: customers buy puts for protection and sell calls for income, so dealers are assumed long calls and short puts. Then:

  • Net GEX = gamma from calls (positive) - gamma from puts (negative), in dollars per 1% move.
  • The flip is the price where the net would change sign.
Gloom screenshot: The idea behind GEX, illustrative shape
The idea behind GEX, illustrative shape: above the flip, positive gamma (dealers sell rallies and buy dips); below it, negative gamma (dealers sell dips and buy rallies).

Because the convention can be wrong, Gloom also shows a dealer range: the result if dealers held only 25% to 75% of the open interest.

Diagram: Open interest by strike leads to Assume dealers long calls, short puts; Implied vols leads to Assume dealers long calls, short puts; Assume dealers long calls, short puts leads to Net gamma in $ per 1% move; Net gamma in $ per 1% move leads to Flip: where net changes sign; Net gamma in $ per 1% move leads to Range if dealers hold 25-75%.

See it in Gloom

Gloom screenshot: GEX SPY across all expiries
GEX SPY across all expiries: net dealer gamma, the flip, the dealer range, and the net value by strike around spot. Historical example.

open ittype GEX SPY, or OPX SPY and the GEX tab. Expiry tabs: All or one date.

  1. Net GEX +12.53B $ per 1% move: on this convention, dealers would trade about 12.5 billion dollars against a 1% move: positive, a stabilizing setup.
  2. Flip 772.86 -0.7% vs spot: below about 773, the estimate turns negative.
  3. Dealer range -5.23B to +17.77B 25-75% with dealers: if dealers held a different share, the total could even be negative. Treat the sign with care.
  4. The bars: big green bars at 780, 785 and 787 (call-heavy strikes above spot); red bars below the flip.
  5. Table row 767 +183.40M -756.56M -573.16M: heavy put gamma at a strike below spot makes the net negative there.

Practice and recap

Try it3 tasks
  1. Spot drops from 778 to 770 in this screenshot. Which side of the flip is that? (Below it: negative gamma territory on this estimate.)
  2. Why does the dealer range matter? (It shows how much the answer depends on the assumption about who holds the options.)
  3. In positive gamma, do hedgers buy or sell into a rally? (Sell.)
Common mistakes4 mistakes
  • Treating GEX as observed data. It is a model on top of open interest.
  • Expecting the flip to act like a hard floor or ceiling.
  • Ignoring that open interest is a day old.
  • Applying index logic to single stocks where customer positioning can be the opposite.
Check yourself3 questions
  1. What does positive dealer gamma do to market moves, in theory?
  2. What is the flip level?
  3. What assumption does GEX make?
Answers
  1. It dampens them: hedging sells rallies and buys dips.
  2. The price at which estimated net dealer gamma changes sign.
  3. That dealers hold the other side of customers: long calls, short puts.
Words in this lesson5 words
dealer gamma (GEX)
Estimated dealer hedging per 1% move, from open interest and gamma.
flip level
The price where estimated net dealer gamma changes sign.
dealer range
The result if dealers held 25% to 75% of open interest.
positive / negative gamma regime
Dealers lean against / chase price moves.
hedging flow
Buying or selling done to stay hedged, not to bet.

Educational material about reading market data, not investment advice.