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Understanding Gamma Exposure and How it Moves Markets

In this series of articles, I will address a concept known as gamma exposure.

Gamma Exposure: A very brief overview

Gamma exposure is an estimated measure of the overall option market makers’ (aka option dealers’) exposure to the options Greek known as gamma.

Gamma exposure is an estimate that can help you gauge future volatility and stock price variance.

Gamma exposure informs you how options market makers will likely need to hedge their trades to ensure their options books are balanced.

Much of the discussion on gamma exposure relates to options traded on S&P 500 (SPX) because the options market on this ticker has outsize effect on determining the index price level.

My introduction to Gamma Exposure

I first heard about gamma and its effect on stocks from notes written by Charlie McElligott at Nomura.

I’d see articles from time to time and gamma exposure seemed rational and interesting. I just had to learn more.

I discovered SqueezeMetrics on Twitter which provided me with more information regarding gamma exposure than any other source I’ve seen yet.

Go check out SqueezeMetrics and white paper to learn more. It was one thing I found that actually seemed to explain why the market moved the way it did over very short term (1-3 day) time periods.

Want to Gain a Deeper Understanding of Gamma Exposure?

Frequently Asked Questions

What are the options Greeks?

What is gamma in options trading?

What is an options market maker (options dealer)?

What is delta hedging? How does this influence option market makers’ gamma exposure?

Why does gamma exposure suppress or exacerbate stock price movements?

What basic assumptions are made in calculating Gamma Exposure?

How the limit order book became abstracted into options and why gamma exposure matters

Learn more about Gamma Exposure with these great resources

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Author: Trader Court

CPA first, pivoted to python programmer focused on data science which I apply to my own stock and options trading.

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