SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

What is Gamma Hedging and Why is Everyone Talking About It?

The options markets significantly changed following the pandemic. People got laid off from their jobs or sent to work from home and got bored, so they started trading options. But brand new retail traders weren't selling SPY call spreads. They were buying weekly options in high-momentum, and they were doing it in numbers enough to alter the order flow of the entire options market.

During the pandemic, people couldn't get drunk, hang with their friends, or go golfing, so they replaced those hobbies with options trading. Bloomberg's Matt Levine calls this phenomenon the boredom markets hypothesis. Here's Matt explaining:


The weird thing about the coronavirus crisis is that it simultaneously (1) caused a stock market crash and (2) eliminated most forms of fun. If you like eating at restaurants or bowling or going to movies or going out dancing, now you can’t. If you like watching sports, there are no sports. If you like casinos, they are closed. You’re pretty much stuck inside with your phone. You can trade stocks for free on your phone. That might be fun? It isn’t that fun, compared to either (1) what you’d normally do for fun or (2) trading stocks not in the middle of a recessionary crisis, but those are not the available competition. The available competition is “Animal Crossing” and “Tiger King.” Is trading stocks on your phone more fun than playing “Animal Crossing” or watching “Tiger King”? I have no idea, I have never done any of those things, but I gather that for some people the answer is yes.


Because retail traders were all doing the same thing--buying weekly options in hyped-up stocks, market makers had trouble adjusting and often saw their positions overrun.


The primary mechanism behind retail traders getting a few over on option market makers is a gamma squeeze. Gamma is option Greek which measures how rapidly delta changes, allowing you to hedge more effectively.

What is Gamma?

Gamma is like the "delta of delta." While delta measures how an option price changes given a $1.00 move in the underlying price, Gamma measures how delta changes given the same $1.00 in the underlying.


You can think of it like the "momentum" of delta. All traders are familiar with momentum trading -- in which the price of a stock increases faster the more it rises. You can think of Gamma as the momentum of delta.


Gamma is vitally important to professional options traders who surgically manage their portfolio risk. After all, when your delta changes, your exposure changes. If you bought a bunch of 0.20 delta calls and suddenly become 0.70 delta, your exposure just went up exponentially, hence, your risk.


Because Gamma tells you how fast delta changes, it hints at how your position might move in the future.


A good rule of thumb is that when you're short options, you're short Gamma and vice versa. Market makers are primarily short options due to the overall demand from options traders to buy puts for protection or calls for speculation.


Because market makers are short options during a significant market catalyst or period of volatility, they’ll often have to hedge in the same direction as the underlying stock price. If market makers are short calls, they’ll have to buy more shares to delta hedge as the underlying stock price rises.


These situations, where the market makers are a sort of "forced buyer," are the golden goose for many options traders.


What is Gamma Hedging?

Gamma hedging simply refers to this act of continually adjusting your delta hedge as a market maker.


Let's consider what happens when you buy a call option. Most of the time, a market maker takes the other side of your trade. Market makers are agnostic about the direction of the stock, they're just aiming to sell you the call at slightly above its intrinsic value. So they hedge their position.


Perhaps you bought a delta 0.40 call. The market maker now has to buy 40 shares of the underlying stock to remain delta neutral. This way, he is only exposed to the volatility aspect of the options trade and not the directional aspect.


However, as we know, delta can change. Say the delta of the given option goes from 0.40 to 0.70. The market maker has to buy another 30 shares of stock.



This is a routine part of a well-functioning market. It generally works fine because, typically, for every person wanting to buy a call, someone is willing to sell a call, buy a put, etc. Markets tend to stay within a state of equilibrium.


But suppose you introduce a group of traders who are buying only short-dated call options into a market at equilibrium. In that case, it gets disrupted, and that's when a "gamma squeeze" occurs.


The Role of a Market Maker

A market maker provides liquidity to both sides of the market. He is a volume trader and makes money by making thousands of trades that show a small profit. He bids (offers) slightly below (above) what he deems as fair value and makes a tiny average profit on each trade.


Market makers strive to remain market neutral. They don't care if the market goes up or down or want exposure to that fact. They bet that their judgment of fair value is, on aggregate, close enough to correct for them to profit.


As a result, market makers manage their inventory and ensure they never end up too short or too long. But sometimes, people only want to sell to you, forcing you to provide tons of liquidity to only one side of the market.


What is a Gamma Squeeze?

An entire cottage industry around options gamma and Gamma squeezes sprouted up in response to the rise of retail traders buying call options en masse. Retail stock options volume went from $20 billion in 2010 to $240 billion in 2020, according to


At least in hyped-up names, the options market changed so dramatically that professional traders needed to quickly adapt by understanding the effects these new traders had on the market.


A gamma squeeze occurs when the standard mechanisms of options call buying and market maker delta-hedging gets disrupted. Too many traders are doing the same thing--in this case, buying short-dated call options.


Retail call buying forces market makers to buy stock to hedge their short call position. The market maker share buying pushes up the underlying price, which pushes up the delta of retail’s calls, which creates a feedback loop.


This quick change in delta makes gamma rise, forcing market makers to hedge even more aggressively, just throwing oil on a fire.


Furthermore, as the retail traders make money, they begin putting their foot further on the accelerator and buying more calls, with the allure of making insane gains. Call buying leads to more call buying, and gamma hedging leads to more gamma hedging. This ensures that the underlying stock's price will soon be divorced from reality.


The most classic example of a gamma squeeze, and primarily responsible for the term becoming part of mainstream financial vernacular, was the GameStop 2021 squeeze. While marked as merely a short squeeze, the options market played a far more prominent role than reported.


On January 28th, 2021, GameStop options registered a put/call ratio of 0.12, meaning 12 puts were purchased for every 100 calls. The vast majority of which were short-dated.


The market makers become the "whales" of the market who are too big to maneuver, allowing swift traders to front-run their order flow.


Bottom Line

  • Gamma is everyone's favorite option Greek nowadays, and much of the mainstream options trading world has shifted towards trying to exploit market dynamics related to Gamma.
  • Gamma is the rate of change of delta. It helps market makers and other traders adjust their delta hedges.
  • A gamma squeeze occurs when market makers are short Gamma in a volatile market and are forced to continually hedge in the direction the market is moving, creating a feedback loop.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills


Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles


  • Short Gamma vs. Long Gamma

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.


    By Pat Crawley,

  • 7 Steps To Take Your Investments To The Next Level

    Investing is one of the most important activities you can do for yourself. In today's world, it's becoming increasingly important for individuals to take control of their financial future and ensure that their investments are working in their favor. So if you're looking to take your investment strategy up a notch, there are seven essential steps you should take.

    By Kim,

  • SteadyOptions 2022 - Year In Review

    2022 marks our 11th year as a public trading service. We closed 147winners out of 215 trades (68.4% winning ratio). Our model portfolio produced 90.5% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month in 2022. 

    By Kim,

  • Steady PutWrite 2022 Year In Review

    The Steady PutWrite service consists of two separate strategies available to subscribers known as Steady PutWrite and ETF BuyWrite. Steady PutWrite sells monthly at the money puts on equity indices targeting total notional exposure of 125% and then invests collateral in bond ETF’s.

    By Jesse,

    • 1 comment
  • How Much Do You Need to Start Trading Options?

    Theoretically, anyone can trade options. After all, there are listed options that you can buy for as cheap as $1.00. So what is the right amount of money you need before you can officially dip your toe in the water and give yourself a fair shot at becoming a profitable options trader

    By Pat Crawley,

  • Options Strategies for Small Accounts

    Ask a handful of traders what they deem a “small account” to be and you’ll get probably get a few different answers. For the sake of this article, we classify a small account as having less than $5,000. There’s a number of obstacles you run into trading a small account, like the options in certain underlyings being too expensive for you to trade, as one example.


    By Pat Crawley,

  • 7 Things I Wish I Knew When I Started Trading

    Options Trading can be very exciting and rewarding. But you should not be trading options before learning at least some basic facts about options. Options are very different from stocks.  This article presents 7 basic options trading facts that every options trader should know. Don't start trading of you don't understand them.

    By Pat Crawley,

  • How LEAPS Differ From Short-Term Options

    LEAPS stands for Long-Term Equity Anticipation Security. Which is just a long-dated option, typically referring to those with expirations more than a year out. There’s no technical difference between LEAPS and shorter-term options other than the expiration date. They’re traded on the same exchanges and have the same rules surrounding margin and whatnot.

    By Pat Crawley,

  • What Is An Implied Volatility Crush

    IV (Implied Volatility) crush when the implied volatility of an option takes a nosedive shortly after the conclusion of a catalyst like an earnings report or corporate action. The uncertainty around a company’s earnings report (or other significant catalyst) drives option prices up in the lead-up to the announcement, and down following the announcement, once the uncertainty is gone.

    By Pat Crawley,

  • Top features of NinjaSpread

    There are two main goals of the scanner: show you hidden opportunities and save a lot of time with automated scanning. Let’s see what the top features are and how NinjaSpread can help your trading life.

    By Gery,


  Report Article

We want to hear from you!

There are no comments to display.

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now

Options Trading Blogs Expertido