The result is that the movement of stocks is increasingly impacted by the positioning of options traders.
For example, when investors buy a significant amount of call options across the right strikes of a given stock, Market Makers will be forced to buy shares as price rises in order to stay neutral (in this hypothetical scenario Market Maker Gamma Exposure is Negative). The stocks enters a cycle where price continues to rise higher and higher until it reaches areas where Gamma Exposure is significantly diminished. Some recent notable examples from 2021 of this include $TSLA, $AMC, $CLOV, $GME, although it was a factor in much of the 2021 stock market mania.
In the other case where Market Maker Gamma Exposure is Positive, MMs are selling stock and price rises and buying stock as price falls.
The Key Measurement for Gamma Exposure
Gamma Exposure (GEX) only has an impact when it is significant relative to the number of shares traded in a give stock.
GEX provides a measurement of how many shares Market Makers must buy (or sell) in order to stay neutral as the underlying stock moves.
We measure GEX in terms of how many dollars of a security must be bought (or sold) for each 1% the stock moves.
Impact on the S&P 500
The S&P 500 is a widely watched index for U.S. stocks and we watch GEX on it closely because it provides insights on how we can expect the broader market to behave on a given day.
⭐Positive GEX leads to greater stability in price and volatility. Price often gets drawn towards large call strikes, which are generally above the current price. Positive GEX is more meaningful when it is within a continuous trend.
⭐ Negative GEX means elevated short-term uncertainty & volatility. We will generally expect larger daily trading ranges in the index.
action has been indecisive and current GEX is negative. Nimble traders are defensive here with reduced position sizes, as directional moves are less predictable.