Dealer Gamma Exposure (GEX)
Every option you trade has a counterparty. That counterparty hedges. The aggregate hedging behavior of dealers shapes intraday price action in ways that have nothing to do with fundamentals.
The setup
Options market makers and dealers do not take directional bets. They quote both sides of the market and earn the spread. When they get filled on a trade, they immediately hedge out the resulting delta exposure by trading the underlying. The hedge is not perfect; the residual exposure they carry is mostly gamma.
Aggregated across the entire market, dealer net positioning has a shape. They tend to be net short some structures (the ones the market wants to buy) and net long others. The combined gamma exposure of all dealers, summed across strikes and expiries, is called Gamma Exposure, or GEX.
How GEX moves the market
Recall from L.06: long gamma means buying low and selling high during the rebalancing process. Short gamma means selling low and buying high. Now apply this at the dealer level.
- If dealers are net long gamma: as the spot rises, they sell into it; as it falls, they buy. Their hedging dampens moves. The market becomes "sticky" and ranges tighten.
- If dealers are net short gamma: as the spot rises, they buy into it; as it falls, they sell. Their hedging amplifies moves. Markets become trendy and volatile.
This is not a small effect. On days when dealers are heavily short gamma, intraday moves of 1-2% become much more likely. On days when they are heavily long gamma, the market often grinds in a tight range despite headline noise.
The flip point
The level at which net dealer gamma flips from positive to negative is called the zero-gamma flip. It is the most-watched single number in dealer-positioning analysis.
When spot is above the flip, the regime is dampening. Market makers sell on rallies and buy on dips. The market tends to mean-revert. Realized vol comes in below expected. This is the regime that makes short-premium strategies work most consistently.
When spot drops below the flip, the regime inverts. Dealers start buying on rallies and selling on dips. The market tends to trend. Realized vol expands. Short-premium strategies that worked yesterday begin to lose money today even with the same trade structure.
Estimating GEX
Real GEX numbers are not published. They are estimated by aggregating publicly available open interest data and applying assumptions about who holds each side of each contract. Several services (SpotGamma, SqueezeMetrics, and others) publish daily GEX estimates.
The methodology, in outline: take the open interest at every strike for every expiry. Multiply by the gamma of each option. Apply a sign assumption: dealers are typically assumed to be net short calls (because retail and institutional buyers dominate call demand) and net long puts (because of put-selling programs and structured products). Sum across the surface.
The numbers are estimates. They can be wrong about specific positioning. But the directional signal (above or below the flip, expanding or contracting) is reliable enough to use.
Vanna and charm: the second-order flows
Beyond raw gamma hedging, dealers also adjust positions in response to vol changes (vanna) and time passage (charm). These produce regular flow patterns:
- Vanna flows: when IV drops, the dealer's effective delta exposure changes. They re-hedge. In SPX, falling IV typically generates buying pressure as dealers cover put hedges.
- Charm flows: as time passes, options' deltas drift. The OTM put delta drifts toward zero, releasing dealer-held shares back into the market. This often produces buying pressure into the close on options expiry days.
These flows are smaller than primary gamma hedging but show up regularly enough that traders track them. The patterns are most visible in the last hour of trading on monthly options expiry Fridays (the third Friday of each month).
OPEX and pinning
As an expiry approaches, gamma at strikes near spot rises sharply (L.06 and L.07). Dealer hedging becomes more aggressive. The cumulative effect often produces pinning: the underlying gravitates toward, and gets stuck at, a strike with very high open interest as expiry approaches.
Pinning is real. It has been studied empirically and the effect is statistically significant. Stocks with high options volume around an expiry often close within a few cents of a major round-number strike. The mechanism is dealer hedging as gamma blows up.
Lesson L.22 covers pin risk in detail. For now: GEX is the underlying explanation.
Where the framework breaks
GEX is a useful framework for normal-regime SPX trading. It is less useful in crisis regimes where dealer positioning shifts violently and the standard sign assumptions break down. During the COVID crash of March 2020, dealer hedging amplified the move dramatically. By the bottom, the GEX flip had moved hundreds of points in days.
It is also less useful for single-name stocks where one or two large positions can dominate the aggregate. The cleanest GEX signal lives in highly liquid index complexes (SPX, NDX, RUT) where positioning is diversified across many participants.
How to use GEX
Three practical applications:
- Regime classification. Use GEX to identify whether you are in a long-gamma (sell vol) or short-gamma (avoid selling vol) regime.
- Intraday range estimation. Long-gamma days have tighter expected ranges. Short-gamma days require wider stops and smaller positions.
- Strategy selection. Iron condors and credit spreads work better in long-gamma regimes. Long-vol structures and outright stock work better in short-gamma regimes.
What you carry forward
- Dealer hedging shapes intraday price action through gamma exposure (GEX).
- Long dealer gamma dampens moves; short dealer gamma amplifies them.
- The zero-gamma flip is a regime boundary worth watching.
- Estimated GEX is a directional signal, not a precise number.
- Pinning is real and is driven by gamma hedging near expiry.