Market Maker Gamma refers to the sensitivity of a market maker’s delta exposure to changes in the underlying asset’s price. In crypto options trading, this represents how quickly a market maker’s hedge position (delta) needs adjustment as the price of the underlying cryptocurrency moves. Its purpose is to quantify the rate of change in the market maker’s directional risk, enabling them to manage their portfolio’s overall delta neutrality effectively and dynamically.
Mechanism
The mechanism involves the market maker holding a portfolio of options contracts and an offsetting position in the underlying asset. As the underlying asset’s price changes, the delta of the options portfolio also changes, creating a new net delta exposure. Gamma measures the speed of this delta change. A positive gamma means delta increases when the price rises and decreases when it falls, requiring more frequent and potentially larger adjustments to the underlying hedge to maintain neutrality.
Methodology
The methodology for managing market maker gamma centers on continuous rebalancing of the delta hedge. Market makers employ algorithms to monitor real-time prices and recalculate portfolio deltas and gammas. When gamma is high, the system prepares for more frequent hedging trades, adjusting the size and direction of the underlying asset position to offset the changing delta. This systematic risk management ensures that the market maker remains relatively indifferent to small price movements, facilitating liquidity provision and managing capital exposure.
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