Market Makers' Gamma Exposure Projection

In a positive gamma environment (blue background), market makers hedge by trading the underlying asset—typically ES futures for SPX options—against price movements. As gamma increases, market makers are more likely to suppress volatility, which often leads to slower price movements or even price rejections.

Looking at the 3D surface, you can think of it like climbing a mountain—it’s much harder to climb uphill than to come down. The same idea applies to gamma. The higher the surface, the higher the gamma exposure. As the price moves against this "uphill" gamma exposure, we expect stronger hedging pressure from market makers to resist the price movement. The top of the mountain represents the key support or resistance levels, where price movement tends to slow down. Once the price moves over the peak, it can fall into the valley with less resistance.

In a negative gamma environment (red background), market makers hedge their options portfolio by trading with the price movements of the underlying asset. In these environments, market makers extract liquidity from the market, leading to higher volatility and wider price swings. The most volatile point typically occurs where gamma exposure is locally low because the hedging flows are strongest there. Keep in mind, as market makers actively hedge their positions, a large customer order can quickly change the market landscape. In this case, the underlying price becomes more sensitive to large orders.

Looking at the 3D surface, you can think of it like climbing a mountain—it’s much harder to climb uphill than to come down. The same idea applies to gamma. The higher the surface, the higher the gamma exposure. As the price moves against this "uphill" gamma exposure, we expect stronger hedging pressure from market makers to resist the price movement. The top of the mountain represents the key support or resistance levels, where price movement tends to slow down. Once the price moves over the peak, it can fall into the valley with less resistance.

The following examples showcase how our daily model heatmaps work. The same dynamics apply for the intraday model.

In this image, the SPX is in a positive gamma environment (blue color). As the underlying price rises and moves toward a region of higher gamma exposure (darker blue), we expect strong selling pressure from market makers hedging against price movements. In such cases, the high gamma level acts as resistance to the price.

Remember, gamma works both ways. In a positive environment, the hedging pressure works against price movement in both directions. If the price moves downward into an area of high gamma exposure, we would expect market makers to apply buying pressure, acting as a support level.

A rejection may not always occur. However, in areas of high gamma exposure, we often see a significant slowdown in price movements.

Understanding these dynamics, one can see that moving toward areas of lower gamma exposure should structurally be easier for the underlying price, as there is less counter trend hedging flow compared to moving into a high gamma environment.

In a negative gamma environment, market makers hedge with the price movement—buying in a rising market and selling in a downtrending one. This creates a more volatile landscape, with sharper and wider price swings.  

If the price moves from a negative gamma environment to a positive one, a major shift in dynamics occurs. Instead of hedging with the price movement, market makers now hedge against it. It’s like going from pressing the gas pedal to suddenly hitting the brakes.  This shift often provides significant support or resistance, depending on the direction of the move. Remember, gamma impacts price movement both ways.

On the other hand, moving from a positive gamma environment to a negative one creates a different scenario. In this case, market makers go from hedging against price movement to no longer being influenced by gamma (where gamma equals 0). If the price continues into a negative gamma environment, market makers would now hedge with the price movement, potentially amplifying the existing trend.