Learn · options market structure
What is dealer hedging?
Dealer hedging is the buying and selling of the underlying stock or futures that options market makers do to stay market-neutral after taking the other side of customer trades. Because it is driven by option greeks rather than opinion, it creates predictable flows around large strikes and expirations.
Dealers amplify moves: trending and higher intraday volatility.
Delta hedging
A dealer short calls is short delta and buys stock to offset it; as price rises the calls' delta grows and the dealer buys more. Gamma measures how fast that delta changes.
Why it moves prices
When hedging flows are large relative to normal volume, they can slow a move (when dealers are long gamma) or speed it up (when short gamma). That is the mechanism behind gamma walls and the gamma regime.
Vanna and charm
Hedges also change as implied volatility moves (vanna) and as time passes (charm), which is why flows around expirations and volatility shocks get attention.
Related
- What is gamma exposure (GEX)?
- How do options market makers move prices near expiration?
- What does negative gamma mean for the stock market?
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