When retail traders began discussing "gamma squeezes" during the GameStop episode of early 2021, a derivative concept that had previously lived only in options trading desks entered mainstream financial discourse. Gamma is one of the "Greeks" — the mathematical sensitivities of an option's price to changes in underlying variables. Of all the Greeks, gamma is the most important for understanding how options affect the behaviour of the underlying market itself.
Delta and why gamma matters
Start with delta. A call option with a delta of 0.40 means the option gains $0.40 for every $1 rise in the stock. If you sell that call option to a client, you are short delta — you lose money when the stock rises. To hedge, you buy 0.40 shares of the underlying stock per option. Now the stock rises $1. Your option is now deeper in the money — its delta has increased, perhaps to 0.55. You now need 0.55 shares to hedge. So you buy more shares. This is dynamic (delta) hedging: continuously re-balancing to maintain a delta-neutral position.
Gamma is what forces you to do this re-balancing. High gamma means delta changes rapidly, forcing large and frequent hedge adjustments. Near expiry on at-the-money options, gamma is extremely high: a small price move can cause delta to jump from 0.45 to 0.55, requiring a significant increase in the hedge.
Long gamma vs short gamma
A market maker who has sold options to clients is typically short gamma. When the market moves, they must chase the move to re-hedge: if the market falls, they sell the underlying; if it rises, they buy. This is inherently destabilising — short gamma positions amplify market moves by trading in the direction of the move. Conversely, a trader who has bought options is long gamma: as the market moves, their hedge needs create counter-trend flows — buying when the market falls and selling when it rises — which is naturally stabilising.
Gamma and implied move
Options market makers often talk about being "long or short the market's gamma." In aggregate, the market-wide net gamma position (dealer gamma) has a measurable effect on intraday volatility. When dealers are estimated to be long gamma (i.e. have sold options they now own net), they suppress volatility through their stabilising hedges. When dealers are estimated to be short gamma, realised volatility tends to be higher and moves more directional. Several research firms and hedge funds now track estimated dealer gamma exposure as an input to volatility forecasting and market structure analysis.