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.