Dealer gamma exposure
The aggregate gamma (options-greeks) of the option positions held by the people who hedge them, and the stock trading that keeping those hedges forces. It is the channel by which option activity moves the underlying without anyone being informed about anything, which makes it the necessary second half of any reading of unusual-options-activity.
The mechanism
Delta is a hedge ratio and gamma is how fast that ratio moves. A hedger who is short options holds negative gamma: as the stock rises the hedge needs more stock, so they buy into strength and sell into weakness, amplifying the move. A hedger who is long options holds positive gamma and does the reverse, damping it. Since open interest nets to zero across all holders, whichever side customers are on, the hedging side holds the opposite — which is why the sign of customer demand is the whole question.
The prediction is therefore directional in volatility, not in price: negative net gamma among hedgers → higher realized volatility and momentum; positive → lower volatility and reversal.
What has been measured
With the positions observed. pervasive-impact-of-option-trading uses CBOE open interest split by investor class, 1990–2001, to compute the net gamma of likely delta-hedgers directly, and finds the predicted significant negative relationship with absolute stock returns. It holds excluding expiration weeks, in both halves of the sample, and in large and small stocks. Magnitude: about 12% of the daily absolute return of an optioned stock, with hedge-rebalancing volume large enough (≈14% of average total volume per standard-deviation shock) to make that plausible.
With the positions assumed. gamma-fragility rebuilds the measure from public OptionMetrics open interest and gammas, 1996–2017, on the 300 most active underlyings. Holder identity is not public, so the dealer sign is an assumption, chosen by citing the CBOE evidence in information-in-option-volume. It recovers the same negative sign on volatility, adds that the effect lives for about two days, is stronger in less liquid underlyings, shows up as intraday momentum peaking at a 30-minute rebalancing horizon, and raises the probability and size of flash crashes — though the autocorrelation effect is small in economic terms and the crash effect weakens after 2010 circuit breakers.
Where they agree is the sign and the liquidity condition. Where they differ is what a practitioner can have: the paper with the private data measured who held what; the paper without it had to guess, and says so.
Why the retail version is the harder case
Public gamma-exposure numbers are computed from listed open interest under a fixed convention — that dealers are short customer-held calls and long puts, or some variant. gamma-fragility adopts one of these deliberately and reports that for single-name options the imbalance varies over time and across the cross-section, so the convention is least safe exactly where a unusual-options-activity screener operates. Index-level gamma is on firmer ground for the opposite reason from the flow signal: index option positions are large and one-sided enough to proxy, even though index option volume carries no directional information at all.
Neither source here reports a strategy, a Sharpe ratio or a cost model built on gamma exposure, and no source in this spoke tests one. The corpus supports "hedging flow moves stocks and the sign is knowable in principle." It does not support "you can trade it," and the distance between those two is the same distance backtest-overfitting keeps measuring elsewhere in this wiki.
Related
options-greeks · unusual-options-activity · option-pricing · pervasive-impact-of-option-trading · gamma-fragility · information-in-option-volume · market-making · market-regime-analysis · synthesis