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Also, gamma has a kind of self-reinforcing feedback loop. When the options are initially way OTM the market makers only need to hedge with a small amount of the
by AndrewBissell 6y ago
Also, gamma has a kind of self-reinforcing feedback loop. When the options are initially way OTM the market makers only need to hedge with a small amount of the underlying. But as the price runs closer to the option strikes the delta impact of a given move becomes larger and larger, so MMs have to hedge with more and more of the underlying, which can itself push the price farther in the same direction.
- quickthrowman 6y agoAnd then the options expire, MMs unwind their hedges and gamma comes back down. There’s no infinite gamma trick
- AndrewBissell 6y agoYes, obviously the reflexivity does not proceed ad infinitum, but these dynamics are often responsible for extremely violent moves in the short term. The effects can be even more pronounced right before expiration. http://m.koreatimes.co.kr/pages/article.amp.asp?newsIdx=77682 http://m.koreatimes.co.kr/pages/article.amp.asp?newsIdx=7768...
- quickthrowman 6y agoIndeed, gamma squeezes can produce lots of volatility near OpEx. And call rolling can just push the gamma further out for another squeeze come the next OpEx.