Estimate dealer gamma exposure for tracked equities; classify long/short gamma and pinning/amplification implications
Answers whether dealer positioning in a tracked stock is likely to dampen or amplify price swings. It reads gamma-exposure data built from aggregated options open interest and Greeks, covering net dealer gamma, the pin strike, an amplification zone, a zero-gamma level, and coverage. It classifies the regime as long gamma (dealers stabilize, price pins), short gamma (dealers amplify moves), or neutral, and marks short-gamma names with an alert stating that dealer hedging tends to add to price moves. A short-gamma reading is a hypothesis about the volatility regime that rests on an assumed dealer side, not a directional forecast, and dealer hedging is one flow among many that need not dominate.
Dealer gamma - a real mechanism with a genuinely sound explanation, resting on one input that is not observable.
THE GREEKS INVOLVED. DELTA is the rate of change of an option's value with respect to the underlying - the hedge ratio. GAMMA is the rate of change of DELTA with respect to the underlying, the second derivative of value with respect to spot. Gamma is what makes a delta hedge need continual adjustment: as spot moves, the required hedge changes, and gamma says how fast.
THE MECHANISM, which is worth teaching because it is a rare case of a market-structure argument with a real causal chain. A market maker who is delta-hedged must trade to stay hedged as spot moves, and the DIRECTION of that trading depends on the sign of their gamma.
The two are easy to swap, so hold on to the pairing: SELLING INTO A RISE AND BUYING INTO A FALL IS LONG GAMMA, and it damps. BUYING INTO A RISE AND SELLING INTO A FALL IS SHORT GAMMA, and it amplifies. An example that shows a short-gamma book selling as price rises has described a long-gamma book.
Both are tendencies, not certainties. Hedging is one flow among many and need not dominate, and dealers are not continuously or fully delta-hedged in practice.
The ZERO-GAMMA level is the spot price at which aggregate dealer gamma changes sign - the boundary between those two regimes. PINNING refers to price clustering at a large open-interest strike into expiry. It is empirically documented rather than folklore: Ni, Pearson and Poteshman (2005) found stock prices cluster at option strikes on expiration days, with evidence consistent with contributions from BOTH hedge rebalancing and deliberate manipulation. Note what that does not establish - it does not say any given large-open-interest strike will attract price.
THE UNOBSERVABLE INPUT, and this is the caveat that governs everything above. Computing dealer gamma requires knowing which SIDE of each contract the dealer is on. Exchanges publish open interest - how many contracts exist - not who is long and who is short. So a dealer-gamma estimate built from PUBLIC option-chain open interest necessarily assumes a dealer side. Public calculators impose different and conflicting sign conventions, which is why two gamma-exposure figures for the same stock can disagree substantially; there is no standardised methodology. (Vendors with proprietary customer-flow or trade classification hold more information than the public chain, so not every published figure rests on the same assumption.)
SO READ IT AS A CONDITIONAL. If dealers are positioned as assumed, then hedging flow leans this way. The mechanism is sound; the input is estimated. Treat a short-gamma reading as a hypothesis about the volatility REGIME - moves may extend rather than mean-revert - and not as a directional forecast, since gamma is direction-agnostic and amplifies moves either way.
The regime labels, the amplification zone and the coverage figure are our own convention.
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