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Trading Negative Gamma

A normal market is characterized by positive gamma. However, when fear or uncertainty arises, the market shifts into a negative gamma state, resulting in different market dynamics. Negative Gamma represents a market dominated by put options and bearish sentiment among participants, with lower gamma values associated with instability, higher volatility, and reduced liquidity.

Strategies that are effective in a positive gamma environment often prove ineffective in a negative one. When market conditions change, it requires us to adjust our trading approach. The following tips and observations will provide guidance in this context.

Tips & Observations:
  • The market typically enters a negative gamma state due to fear, either in response to or in anticipation of a catalyst.

  • When the SPX transitions from a positive to a negative state, it often results in multi-day price move, with the Put Wall as a logical downside target.

  • A shift lower in the Put Wall is a bearish signal and generally foreshadows lower future prices.

  • To shift the market back into a positive gamma state, a positive catalyst is typically required, prompting participants to shed their put protection and encourage volatility selling.

  • Trending days are the norm, and market cycles can remain at extremes for extended periods.

  • Due to the cyclical nature of hedging (selling weakness, buying strength), levels break more easily and are more prone to false breaks. Therefore, it is wise to focus on the most significant levels, such as 50 and 00.

  • The expansion of implied volatility magnifies price fluctuations, making it advisable to align your trades in the direction of implied volatility.

  • On strong trending days, consider utilizing the 1-minute cycle or await a midday 5-minute setup if you're not already aligned with the prevailing trend.

  • Dealer hedging is most active during the first and last hour, often leading to significant directional moves during that time.

  • It’s common for the market high or low to be established in the early morning, and for the market to close near its daily high or low.

  • Exercise caution when attempting counter-trend strategies or trading counter to extreme moves in implied volatility.

  • If a reversal is to occur, it generally happens around 1:00/2:00 pm ET.

  • Entries at the Put Wall represent high-probability counter-trend setups and frequently serve as pivot points for multi-day up moves.

  • The most significant market rallies occur from a negative gamma state, driven by squeeze dynamics in response to one-sided positioning.

  • Volatility Pin (VP) is more likely to be in play in negative gamma compared to an environment characterized by positive gamma because of the elevated volatility.

  • Pin predictability tends to be lower when in a negative gamma state. However, selling rallies, employing single options, DSS cycle high setups, Put Wall, and trading in alignment with implied volatility have shown high effectiveness.


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