Dealer Hedging Dynamics - Gamma Regimes

Understanding the basic dealer gamma exposure profile (GEX) through the lens of the S curve is one of the first steps to forming a trading strategy around these hedging flows.

Broadly speaking-

The original GEX curve is calculated by taking the ENTIRE SPX Open Interest and tagging each Call option as a "dealer long", and each put option as a "dealer short"

In the end, the "dealer position" as derived this way... is not *really* the dealer position (who are we kidding??)

...but the approach was once valid- when the primary user of options was a simple hedger.

Watch the video while keeping in mind those limitations. Often this profile is still fundamentally part of the backbone of the SPX- in either a weak or strong form- because hedging and overwriting are of course still large contributors to the overall volumes.

Hold in mind, also, the idea of "regimes"-

Broad, stable "long" gamma regimes which are often characterized by low volatility (due to hedging flows counterbalancing exogenous/natural flows)

Neutral regimes / flips - where dealers are not present, and the market "hangs in the balance", sensitive to changes in volatility which can then thrust the market into oblivion (or save it- for it to go back to safety)

Toxic regimes / Negative gamma - "oblivion" where dealers are making matters worse, because instead of absorbing exogenous flows- they are RACING exogenous flows and amplifying market movement.

"Gasoline on the fire"

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