THE LEXICON · DEALER GAMMA
Dealer gamma and the flip
Dealer gamma is an estimate of how much options dealers must buy or sell as the index moves, given the open interest they are positioned against. The flip is the index level where that estimate changes sign.
What dealers are hedging
Every listed option has a dealer on the other side of it. A market maker who sells a call is short that call and hedges the directional exposure with stock or futures. Gamma is the rate at which that hedge requirement changes as the index moves — the higher it is, the more the dealer must adjust to stay neutral. Dealer gamma aggregates the estimate across the chain: every strike, weighted by open interest and by how much hedging each contract implies at the current index level. The output is a single net figure, commonly called net GEX.
The estimate exists because that hedging is mechanical rather than discretionary. A book run neutral does not decide whether to buy as the index rises; the position decides. Aggregate enough of those obligations at the same strikes and the flow becomes large enough that desks want it measured. That premise is also the first place the number can be wrong.
Positive, negative and the flip
When net gamma is positive, dealer hedging leans against the tape, selling into strength and buying into weakness, and moves tend to be dampened. When it is negative, hedging leans with the tape and moves tend to run. These are tendencies in one stream of flow, not rules about price. The flip is the index level where the estimate changes sign: above it the model reads one regime, below it the other.
The flip is not a fixed address. It is an output that moves with spot, with the open interest added or closed each day and with the expiries rolling off the board. A flip computed in the morning and a flip computed near the close are two different numbers from the same model, which is why it is read fresh rather than carried forward.
What it does not tell you
It does not tell you direction. A negative reading describes a condition in which hedging amplifies whatever move occurs — it says nothing about which way that move goes. It does not tell you size either: gamma estimates the responsiveness of hedging, not the volume of everything else transacting against it. And it does not tell you who is actually short the gamma. Every gamma number anywhere rests on a model of who holds what, and that assumption is inferred from open interest rather than observed.
Different providers make different assumptions and publish different flips on the same day. That is not a scandal; it is what happens when a model does work no exchange does for you. The terminal states its assumptions on the panel itself, and the SPX chain it reads is delayed rather than live.
How the desk reads it
As context, before the session and during it, rather than as a trigger. A desk checks the regime to know what the hedging stream is leaning toward, notes where the flip sits relative to the current index level and treats the distance between the two as information about how stable that reading is. A flip far below spot and a flip a few points away are the same word on a screen and very different situations.
What it does not do is produce the trade. Levels come from structure. Gamma describes the medium those levels sit in, and it is read next to the walls, the expected move and the term structure rather than alone. It is a condition on the tape, not a signal to act on.
How it gets misread
The common one is reading negative gamma as bearish. It is not directional — it describes hedging that leans with the move, whichever way the move goes, and a negative-gamma tape that grinds higher is the same mechanism working upward. The second is treating the flip as a level: it is one model's output from delayed open interest, not a price where business was done, and two providers will hand you two different flips on the same afternoon.
Where it lives
Dealer gamma is read beside the rest of the options picture — the walls, the expected move and the curve behind them.
THE DESK PUBLISHES THE NQ DEALING RANGE AT 22:03 ET, BEFORE THE SESSION — AND SCORES IT AFTER, EITHER WAY. SEE THE RECORD → · AUDIT THE CHAIN →