Gamma Trading as a Market Maker

Get out of your own head as the market participant (for now).

What is Gamma?

Gamma = the rate of change of delta.

Think of Delta as the engine of a car and Gamma as the gas pedal. The harder you press the pedal, the faster the engine revs. In options, that means the more gamma you have, the faster delta will change as the stock moves.

This means, Delta never stays still.

If you're long gamma, for example, you're buying options from me, the trader, your delta will swing a lot as the underlying stock moves.

If you're short gamma (from selling options), you're delta exposure will flip against you when the stock moves.

You, as the market maker, are always going end up long or short gamma. And this is going to force you

always manage your risk with dynamic hedging with stock.

## Gamma Scalping

If you're long gamma:

Your position gains delta when the stock rises, and loses deltas when it falls.
So you're buying low, selling high (scalping stock around your option).
You bleed theta (time decay), but can "earn it back" if the underlying moves around enough.

I hope this is starting to click into your head on how market makers have a huge impact on the stock...

If you're short gamma:

You're forced to sell low, buy high to keep hedged.
That's painful if the stock is volatile.
Your edge here has to come from the premium you collected up front (selling options at high volatility)

## Key Points

1) Gamma is where the real risk sits.

Directional risk (delta) can be hedged away instantly with stock.

Gamma risk means you'll have to hedge over and over again as delta keeps changing.

2) Time vs movement

Long gamma bleed s theta → you must get enough stock movement to cover the decay.

Short gamma earns theta → but you must pray the stock doesn't whip around too much.

3) Market Makers Live Off It

Market makers don't guess direction. They let their gamma + hedging determine whether they profit.

IF they're long options (long gamma), they make their edge from scalping volatility.
IF they're short options (short gamma), they make their edge by collecting theta and quoting wide enough to survive the hedge pain.

4) Gamma is Relentless

Remember Vega or Theta? gamma forces market makers into action.

If the stock moves, market makers MUST hedge to stay neutral. No hedge → then they're just directional.

I'm going to give you an example so this clicks better for you.

🎯 Setup

Stock = $50
I buy 50 strike ATM call for $2.00 premium
Expiration = 30 days (assuming theta = -0.05/day)
The option has delta = 0.50 and gamma = 0.10
Market maker (you) want to run a long gamma, delta neutral position

🔹 Step 1: Enter the position

Buy 1 call = long delta +0.50
Hedge: short 50 shares stock (so net delta = 0)

Now you're long gamma, flat delta

Cost = $200 (the premium paid)

🔹 Step 2: Stock rises to $51

Call delta increases (thanks a lot gamma)New delta = +0.60
Your call now gives you +0.60 delta.
But you are short 50 shares (–0.50 delta equivalent).
Net delta = +0.10.

So, to stay hedged, you must sell 10 more shares at $51

You collect $510 from the sale

🔹 Step 3: Stock falls back to $50

Call delta drops back to 0.50.
Now you’re short 60 shares (–0.60 delta) and long a call (+0.50 delta).
Net delta = –0.10.

👉 To re-hedge, you must buy back 10 shares at $50.

Cost = $500.

🔹 Step 4: The round-trip P&L

You sold 10 shares at $51, bought them back at $50.
Scalp profit = $10.

Meanwhile:

Your option lost a bit of theta (say –$5).
Net = +$5 profit after one little wiggle.

🔹 The Big Picture

If the stock keeps bouncing around, your gamma hedges keep generating scalp profits.
As long as realized volatility is high enough, those scalps > theta bleed.
That’s how long gamma positions make money.

Flip side:

If the stock just sits there, you bleed theta and can’t scalp anything.
That’s why short gamma (option selling) makes money in quiet markets — but loses big if the stock runs around and forces you to hedge at bad prices.

## Why this matters to traders

A lot of traders, and maybe even yourself, use past data as support and resistance levels. But that's a big problem.

Gamma is a powerful greek to use as support and resistance. It's not psychology, it's mechanics.

Dealers are forced to hedge or unwind their hedge around these levels because of outstanding option positions.

If you can spot them, you know where the market is likely to stall, accelerate, or drift once hedge comes off.

That's an edge most traders never account for.

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