How Does "Negative Gamma" Contribute to Market Instability? ⎊ Path

How Does “Negative Gamma” Contribute to Market Instability?

Negative Gamma occurs when a trader or market maker is short options, often in an effort to collect premium. With negative Gamma, as the underlying price moves away from the strike price, the position's Delta increases in magnitude.

This forces the trader to sell into a falling market (if short a call or long a put) or buy into a rising market (if short a put or long a call) to maintain a Delta-neutral hedge, thus exacerbating the existing price momentum and increasing instability.

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Glossar

Negative Gamma

Exposure ⎊ Negative Gamma represents a portfolio sensitivity where an increase in the underlying asset price leads to a decrease in the option seller’s delta, necessitating further hedging activity.