The previous lesson showed that as price moves, an option's delta drifts, forcing the dealer to rehedge — and that the direction of that rehedging depends on which side of the options the dealer is on. Gamma is the name for how fast delta drifts. This lesson shows that the sign of the dealer's gamma splits the market into two regimes that behave in opposite ways.
Gamma in one sentence
Gamma is the rate of change of delta with respect to the underlying price. High gamma means delta moves a lot for a small price change (short-dated, near-the-money options — recall the 0DTE lesson); low gamma means delta barely budges. What matters for the market is not just the size of gamma but its sign from the dealer's point of view — whether their hedging leans against moves or with them.
The two loops
Long gamma — the shock absorber
When dealers are long gamma, their hedging leans against price moves: they sell as the market rises and buy as it falls. That is stabilising. A rally is met with dealer selling that caps it; a dip is met with dealer buying that cushions it. The feedback loop is negative — moves feed forces that oppose them — so realised volatility tends to compress. Days spent deep in long-gamma positioning often feel slow, mean-reverting, and hard to trend. Think of a heavy shock absorber: push it and it pushes back.
Short gamma — the accelerator
When dealers are short gamma, the sign flips. Their hedging leans with price moves — the exact pattern from the worked example last lesson, where a dealer short calls had to buy into a rally and sell into a decline. Now the feedback loop is positive: a move generates hedging that extends it, which forces more hedging, which extends it further. Realised volatility expands, and moves can become abrupt and self-reinforcing. This is the mechanical engine behind many sharp, seemingly-newsless slides and squeezes. Think of a hand shoving a swing at the top of each arc: each push makes the next one bigger.
Long gamma = negative feedback = moves get absorbed = volatility compresses. Short gamma = positive feedback = moves get amplified = volatility expands. Same hedging machinery, opposite sign, opposite market character.
Reading it on the GEX page
Our GEX page carries a regime read that tells you which side of this line the modelled dealer positioning currently sits on — a "long gamma / short gamma" style chip. Used correctly, it is context, not a trade trigger: it tells you what kind of tape to expect (a fade-friendly, range-bound one versus a trend-and-squeeze-prone one), which is exactly the "what to expect" the regime distinction is good for.
Remember the open-interest lesson: the sign of dealer gamma is inferred from a model built on open interest plus assumptions, not read directly off an exchange-tagged book. The regime chip is a display-tier map of the modelled state, not a signal that tells you to buy or sell. Treat a "short gamma" read as "expect the tape to amplify moves," not as an instruction.
The next lesson looks at the slower, second-order forces — charm and vanna — that nudge delta even when price sits still, and it carries an important honesty note about their limits.
Self-check: 3 questions
- In the long-gamma regime, which way do dealers hedge as the market rises, and what does that do to volatility?
They sell as the market rises and buy as it falls — hedging against the move. That negative feedback absorbs moves and tends to compress realised volatility, producing a slower, more mean-reverting, range-bound tape. - Why does short gamma tend to produce sharp, self-reinforcing moves?
Because dealers hedge with the move: buying into rallies and selling into declines. That positive feedback extends the move, which forces more same-direction hedging, which extends it further. Volatility expands and moves can become abrupt and squeeze-like, even without fresh news. - How should the GEX regime chip be used, and what is it not?
As context for what kind of tape to expect — fade-friendly and range-bound under long gamma, trend-and-squeeze-prone under short gamma. It is not a buy or sell signal: it reflects a modelled state inferred from open interest plus assumptions, presented as a display-tier map, not an instruction to trade.