Gamma Exposure (GEX)
What is Gamma?
Gamma represents the rate of change between an option’s Delta and the price of the underlying asset. High Gamma values indicate that Delta may shift significantly even with relatively small price movements in the underlying security.
What is Gamma Exposure (GEX)?
When the price of a security changes, market participants—particularly market makers—are compelled to adjust their hedges by buying or selling the underlying asset, so that their net Gamma exposure remains neutral or close to zero. This process is known as Gamma hedging and reflects the fact that dealers seek to avoid taking directional market risk.
Gamma exposure is the estimated dollar value that market makers must hedge for every 1% move in the underlying asset’s price.
- When dealers hold a net long Gamma position, they hedge by buying more as the security declines and selling more as it rises, thereby dampening volatility.
- When dealers hold a net short Gamma position, they hedge by selling more as the security falls and buying more as it rises, thereby amplifying volatility.
- The Gamma exposure chart typically displays green bars (positive y-values) when dealers are net long Gamma, and red bars (negative y-values) when dealers are net short Gamma.
Practical Considerations - Although numerous trading platforms now provide Gamma exposure analytics, simply observing positioning is not sufficient to generate profits. Advanced models incorporate not only Gamma exposure but also real-time volatility dynamics as critical variables in strategy development.