What is gamma? A quick recap
Delta is how much an option’s price moves for a $1 move in the underlying, and gamma is how fast delta itself changes. A call with a delta of 0.50 and a gamma of 0.04 will have a delta near 0.54 if the stock rises $1. Gamma is highest for at-the-money options and grows as expiration approaches, which is why 0DTE options are so jumpy. The full explanation, with worked numbers, is in options Greeks.
One property matters for GEX: in the standard pricing model, a call and a put with the same strike and expiration have the same gamma. So when a GEX chart shows calls and puts with opposite signs, the difference comes from who is assumed to hold them, not from the options themselves.
How do market makers delta-hedge options?
Market makers, often called dealers in this context, quote bids and asks all day and end up holding whatever customers buy from them or sell to them. Most aim to earn the spread rather than bet on direction, so they offset the direction risk by trading the underlying. If they are short calls with a combined delta of 40,000 shares, they buy about 40,000 shares. That is delta hedging.
Gamma is what makes the hedge go stale. As the price moves, the options’ deltas change and the dealer must trade again to stay neutral. Whether that rebalancing buys or sells depends on whether the dealer is long or short gamma:
- Long gamma (the dealer owns options): when the price rises, the position gets longer, so the dealer sells some of the underlying; when it falls, the dealer buys. Hedging leans against the move.
- Short gamma (the dealer sold options): when the price rises, the position gets shorter, so the dealer buys; when it falls, the dealer sells. Hedging goes with the move.
- Market maker (dealer)
- A firm that continuously quotes bids and asks in options and usually hedges the resulting direction risk by trading the underlying.
- Delta hedging
- Trading the underlying so that a position’s total delta stays close to zero, then adjusting as delta changes with price and time.
- Gamma exposure (GEX)
- An estimate, built from open interest, gamma and an assumption about dealer positioning, of how much dealers’ hedges would change for a given move in the underlying, often expressed in dollars per 1% move.
How is GEX calculated? One common convention
Public data shows open interest, not who holds it, so every GEX model starts with an assumption. The common simplified one: customers tend to buy puts for protection and sell calls against stock they own, so dealers are assumed to be long calls and short puts. Under that convention, call gamma counts as positive and put gamma as negative. It is an assumption that can be wrong for any given strike, stock or day, and providers use different ones.
One common way to turn that into dollars, strike by strike: GEX = gamma × open interest × 100 × spot price² × 1%. Calls add positive GEX and puts negative GEX, and net GEX at a strike is the sum of both. The result estimates the dollar value of the underlying that dealers would buy or sell for a 1% move.
Hypothetical: a stock trades at $100, and at the $100 strike the calls have a gamma of 0.04 and open interest of 10,000 contracts: 0.04 × 10,000 × 100 × 100² × 0.01 = $4.0 million. In plain words, a 1% move ($1) changes each call’s delta by 0.04; across 1,000,000 shares of exposure (10,000 contracts × 100) that is 40,000 shares, about $4 million of stock. The $100 puts have the same gamma and open interest of 6,000 contracts, which gives −$2.4 million under the convention. Net GEX at that strike is +$1.6 million.
Repeat this for every strike and expiration and you get a profile like the drawing at the top of this page, plus a total. Some providers use spot instead of spot squared, leave out the 1%, weight expirations differently or estimate positioning from trade data, so GEX numbers from two sources are often not comparable.
Positive vs negative gamma: what each regime means
If the model’s total is positive, dealers are estimated to be net long gamma. Their rebalancing sells into rallies and buys dips, which tends to dampen moves: ranges can be tighter and realized volatility lower. If the total is negative, dealers are estimated to be net short gamma, and their hedging sells into drops and buys into rallies, which can amplify moves in either direction.
The drawing below shows the two cases side by side. The words tends to and can matter: hedging is one flow among many. News, earnings, economic data and large orders from other participants can overwhelm it, and a positive-gamma market can still fall hard. Volatility itself is covered in implied volatility.
What is the gamma flip (zero gamma level)?
The gamma flip, or zero-gamma level, is the estimated price of the underlying at which total net GEX changes sign. Models find it by recalculating every option’s gamma at a range of hypothetical prices and seeing where the total crosses zero. Above it, the model says dealers are net long gamma; below it, net short gamma.
In the drawing at the top of this page, the flip sits between the 98 and 100 strikes and the hypothetical price, 101, is just above it: under the model’s assumptions, a positive-gamma regime. If price fell below the flip, the same model would say hedging flows switch from damping moves to adding to them. Some traders therefore watch the flip as a level where behaviour may change, not as support.
The flip is not fixed. It moves as price moves, as time passes and gamma concentrates near the money, as open interest changes overnight and as options expire. A flip computed this morning can be stale by the afternoon.
Call wall and put wall: the largest strikes
A call wall is usually the strike with the largest call gamma or call open interest, typically above the price; a put wall is the strike with the largest put gamma or put open interest, typically below it. In the GEX drawing, they are the tallest green bar at 104 and the deepest red bar at 94. Definitions vary by provider.
The idea is that hedging around those strikes is largest, so they may slow price down or attract it, especially near expiration. Sometimes price stalls at a wall; sometimes it slices through and the wall moves. Treat walls like any support and resistance zone: a place to watch and plan around, not a promise. The raw material, open interest by strike, looks like the drawing below.
Limitations of gamma exposure
GEX is a model built on assumptions, and each one can fail:
- Unknown positioning. Open interest does not show who is long or short. Customers sometimes buy calls in size or sell puts for income, which flips the real sign at those strikes.
- Stale inputs. Open interest is updated once a day, so intraday positions, including 0DTE options opened and closed the same day, are missing from the standard calculation.
- Model differences. Providers use different formulas, scaling, expirations and positioning estimates, so their levels and totals differ.
- Other flows. Changes in implied volatility and the passage of time also shift dealer hedges (effects often called vanna and charm), and the market is far bigger than option hedging.
- Hedging behaviour. Not every dealer hedges the same way, at the same time or completely.
How traders use GEX (and how not to)
Put together, GEX is a map of where hedging flows might be large and which way they might push, under one set of assumptions. It is not a forecast and it does not tell you where price will go. Traders who follow it mostly use it as background: a positive reading as a reason to expect more two-way trade and to be wary of breakouts, a negative reading as a reason to expect wider swings and to trade smaller. Some combine it with the put/call ratio and implied volatility in a market-context checklist.
Strategy choice sometimes follows the regime. Range-bound, premium-selling trades such as an iron condor tend to suffer when moves get bigger, while long-volatility positions such as a straddle or strangle need movement to pay off. GEX is not reliable enough to choose between them by itself; the options strategies overview lays out the trade-offs.
Whatever you watch, keep the plan on the underlying: a level, a stop, a target and a position size you can afford to lose, decided before the trade. Hedging flows are one input; risk control is still yours.