Gamma exposure (GEX) measures how much hedging activity market makers (e.g., institutions that sell options) must perform as the price of a stock or index moves.

It’s derived from gamma, which tells you how sensitive an option’s delta (its price sensitivity to the underlying asset) is to price changes.

Think of it as the “acceleration” of an option’s risk as markets move.

What is gamma exposure (GEX)?

Gamma

Gamma is the second-order derivative of an option’s price, representing the rate of change of delta (the first-order derivative, which measures directional exposure) per 1% move in the underlying asset’s price 15.

For example, a gamma of 0.1 means delta increases by 0.1 for every $1 increase in the underlying.

GEX

Gamma exposure (GEX) aggregates gamma across all options for an asset, reflecting the total delta adjustment required by market makers for a 1% price move.

It is calculated as:

GEX = ΔDelta / ΔPrice (1%)​

For instance, if a 1% price increase raises delta by +7,000 and a 1% decrease lowers it by -5,000, GEX would be 2,000.

Why Gamma Exposure Matters

Market makers (who sell options) constantly hedge their positions to stay neutral. Their hedging activity directly impacts price action:

Positive Gamma Exposure (Long Gamma):

  • Dealers sell stocks when prices rise and buy when prices fall.
  • Stabilizes markets (e.g., dampens volatility).
  • Common when many traders buy puts/calls for protection/speculation.

Negative Gamma Exposure (Short Gamma):

  • Dealers buy stocks when prices rise and sell when prices fall.
  • Fuels momentum (e.g., “gamma squeezes” like GameStop in 2021).
  • Happens when market makers are short options (e.g., during meme-stock frenzies).

Gamma Squeezes: A Real-World Example

A gamma squeeze occurs when a rapid price move forces dealers to buy/sell stocks to hedge their options exposure, creating a feedback loop:

  1. Stock XYZ surges toward a key strike price (e.g., $200 calls).
  2. Dealers who sold those calls must buy XYZ to hedge their rising delta.
  3. This buying pushes prices higher, triggering more hedging, and so on.

This is why stocks like Tesla or AMC can see explosive moves around high-option-activity levels.

How Traders Use Gamma Exposure

  • Spotting Key Price Levels: High open interest at certain strikes (e.g., $SPY 450 calls) act as “magnets.” Prices often gravitate toward these levels as dealers hedge.
  • Timing Volatility: Negative GEX signals risk of sharp moves (e.g., crashes or squeezes). Positive GEX suggests range-bound trading.
  • Avoiding Traps: Retail traders might fade extreme moves near large gamma clusters (e.g., shorting a rally if dealers are forced to sell into strength).

Tools and Limitations

  • Tracking Tools: Platforms like SpotGamma provide real-time GEX dashboards, showing net exposure by strike/expiration.
  • Challenges:
    • Dynamic Nature: GEX shifts rapidly with price movements, requiring constant monitoring.
    • Data Gaps: Retail traders lack complete dealer positioning data, relying on estimates.
    • Oversimplification: GEX aggregates all strikes/expirations, potentially masking nuances

TL;DR

Gamma exposure reveals how market makers’ hedging drives short-term price moves.

  • Positive GEX = Stability.
  • Negative GEX = Volatility risk. Use it to identify explosive zones (like option-heavy strikes) and avoid getting caught in dealer-driven squeezes.