Market Maker Gamma: The Hedging Nobody Reports

Someone is on the other side of every option

When a trader buys a call, a market maker sells it. That dealer does not want a directional bet - it wants the spread. So it hedges, buying or selling the underlying to stay neutral. As price moves, the hedge has to be adjusted, and those adjustments are real orders hitting the same book everyone else trades.

That is the whole mechanism. Gamma is simply how fast the required hedge changes as price moves. When dealers are positioned one way, their hedging dampens moves. Positioned the other way, the same mechanism accelerates them.

What is actually disclosed

Very little of this is reported as dealer hedging, because nobody is required to label it that way.

Public record

Exchanges publish open interest and volume by strike and expiration. The OCC publishes cleared options volume. The CFTC publishes futures positioning by trader category in the weekly Commitment of Traders report, which is the closest thing to a named-participant disclosure in this space - and it covers futures, not equity options. FINRA publishes off-exchange share volume, which captures where trades printed but not why.

Not public record

Which side of each option position a dealer holds. That is the number everything else depends on, and it is not published by anyone. Every gamma exposure figure you will ever see is an estimate built on an assumption about who was buying and who was selling.

Why the estimate is still worth having

The standard assumption - that customers buy calls and sell puts, leaving dealers short calls and long puts - is a generalisation that is wrong in individual cases and directionally useful in aggregate. It produces levels that can be checked against what price actually did, which is the only test that matters.

Modigin computes those levels from exchange open interest and publishes them per instrument. The mechanics differ by product in ways that change the hedge:

• SPY gamma exposure - options settle into shares, so dealer hedging trades the ETF itself, and American-style assignment adds a risk index options never carry
• QQQ gamma exposure - a handful of mega-caps dominate the index, so hedging flow concentrates rather than diffuses
• SPX gamma exposure - cash-settled and European-style, hedged through futures rather than shares, with same-day expirations dominating volume
• the full gamma map by strike - where the exposure actually sits across the chain

Where it connects to positioning we can verify

Gamma estimates are modelled. Two disclosures nearby are not. CFTC Commitment of Traders reports name the trader categories holding futures. FINRA off-exchange short volume reports where shares actually printed away from the lit exchanges. Neither tells you about dealer gamma directly, and both constrain what a gamma story can plausibly claim.

The honest summary: the mechanism is real, the disclosure is partial, and the number is an inference. Anyone selling it as a measurement is overselling it.