A gamma flip refers to a market phenomenon where the collective gamma exposure of market makers or options dealers switches from positive to negative, or vice versa, around a specific price level in the underlying asset. This shift in gamma sign changes the nature of dealers’ hedging activities, transitioning from dampening volatility to potentially amplifying price movements. It is a critical concept in understanding options-driven market dynamics and predicting short-term directional acceleration.
Mechanism
The mechanism of a gamma flip is rooted in the options Greeks. When dealers are net long gamma, they sell the underlying asset as prices rise and buy as prices fall, acting as a stabilizing force. Conversely, when they are net short gamma, they must buy the underlying asset as prices rise and sell as prices fall, thereby exacerbating price momentum. This flip often occurs when the underlying asset’s price crosses a significant options strike price where a substantial amount of open interest exists, altering the overall portfolio delta hedging requirements for market makers.
Methodology
Traders utilize the concept of a gamma flip to anticipate potential accelerations or decelerations in crypto asset prices, particularly around high open interest strike levels. Monitoring aggregated options data, such as gamma exposure charts, allows market participants to identify these inflection points. The methodology involves adjusting trading strategies to capitalize on expected increases in volatility or directional moves once a gamma flip is observed, preparing for scenarios where dealer hedging could push prices further in one direction.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
